The price-to-earnings (P/E) multiple enjoys widespread popularity among investors seeking stocks trading at a bargain. In addition to being a widely used tool for screening stocks, P/E is a popular metric for working out the fair market value of a firm. However, even this straightforward, broadly used valuation metric has a few shortcomings.
While P/E enjoys great popularity among value investors, a less-used and more complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA provides a clearer view of a company's valuation and earnings-generating potential by taking a broader approach to assessing value.
Genesco Inc.GCO, Pampa Energia S.A.PAM, Occidental Petroleum CorporationOXY, Chatham Lodging TrustCLDT and Transportadora de Gas del Sur S.A.TGS are some stocks with impressive EV-to-EBITDA ratios.
Is EV-to-EBITDA a Better Substitute to P/E?
EV-to-EBITDA is essentially the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company's market capitalization, its debt and preferred stock minus cash and cash equivalents. EBITDA, the other component of the multiple, gives a better idea of a company's profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Just like P/E, the lower the EV-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could signal that a stock is potentially undervalued. EV-to-EBITDA takes into account the debt on a company's balance sheet that the P/E ratio does not. For this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another shortcoming of P/E is that it can't be used to value a loss-making firm. A company's earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value loss-making but EBITDA-positive companies. EV-to-EBITDA is also a useful tool in measuring the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.
But EV-to-EBITDA has its shortcomings, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa). It is usually not appropriate when comparing stocks in different industries, given their diverse capital requirements.
A strategy solely based on EV-to-EBITDA might not yield the desired results. However, you can club it with the other major ratios in your stock-investing toolbox, such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.
Screening Criteria
Here are the parameters to screen for value stocks:
EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median:A lower EV-to-EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median:This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median:A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median:The lower the P/S ratio, the more attractive the stock is, as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median:This parameter will help in screening stocks that have growth rates higher than the industry median.
Average 20-day Volume greater than or equal to 100,000:The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5:This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2:It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to B:Our research shows that stocks with a Value Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
Here are our five picks out of the 22 stocks that passed the screen:
Genescois a specialty retail and branded company, which sells footwear and accessories in retail stores throughout the United States, Canada, the United Kingdom and the Republic of Ireland. This Zacks Rank #1 company has a Value Score of A.
Genesco has an expected earnings growth rate of 55.2% for the current fiscal year. The Zacks Consensus Estimate for GCO's current fiscal-year earnings has been revised 4.7% upward over the past 60 days.
Pampa Energiais a leading independent energy-integrated company in Argentina. This Zacks Rank #1 stock has a Value Score of B. You can see the complete list of today's Zacks #1 Rank stocks here.
Pampa Energia has an expected year-over-year earnings growth rate of 39.8% for 2026. The consensus estimate for PAM's 2026 earnings has moved up 12.7% over the past 60 days.
Occidental Petroleumis an integrated oil and gas company with significant exploration and production exposure. This Zacks Rank #2 stock has a Value Score of A.
Occidental Petroleum has an expected year-over-year earnings growth rate of 162% for 2026. The Zacks Consensus Estimate for OXY's 2026 earnings has been revised 68.3% upward over the past 60 days.
Chatham Lodging Trustis a lodging real estate investment trust that invests in premium-branded upscale extended-stay and select-service hotels. This Zacks Rank #2 company has a Value Score of A.
Chatham Lodging Trust has an expected year-over-year earnings growth rate of 25.5% for 2026. The consensus estimate for CLDT's 2026 earnings has moved up 6.7% over the past 60 days.
Transportadorais a leading natural gas transporter in Argentina. Its midstream asset portfolio has the most extensive natural gas pipeline network in Latin America. This Zacks Rank #2 stock has a Value Score of B.
Transportadora has an expected year-over-year earnings growth rate of 21.9% for 2026. The consensus estimate for TGS's 2026 earnings has been revised 6.9% upward over the past 60 days.
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Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
Pampa Energia S.A. (PAM) : Free Stock Analysis Report
Genesco Inc. (GCO) : Free Stock Analysis Report
Chatham Lodging Trust (REIT) (CLDT) : Free Stock Analysis Report
Transportadora De Gas Sa Ord B (TGS) : Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).
