Investors are typically fixated on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straightforward, easy-to-calculate ratio is the most preferred among all valuation metrics in the investment toolkit for working out the fair market value of a stock. But even this ubiquitously used valuation metric is not without its pitfalls.

While P/E is by far the most popular equity valuation ratio, a more complicated metric called EV-to-EBITDA does a better job of valuing a firm. Often viewed as a better substitute to P/E, this ratio offers a clearer picture of a company’s valuation and its earnings potential.

HighPeak Energy, Inc. HPK, BJ's Restaurants, Inc. BJRI, PRA Group, Inc. PRAA, AZZ Inc. AZZ and ADT Inc. ADT are some stocks with attractive EV-to-EBITDA ratios.

Here’s Why EV-to-EBITDA Is a Better Option

Also referred to as enterprise multiple, EV-to-EBITDA is 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. In essence, it is the entire value of a company. EBITDA, the other element, gives a clearer picture of a company’s profitability by removing the impact of non-cash expenses such as depreciation and amortization that dampen net earnings. It is also often used as a proxy to cash flows. 

Typically, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is undervalued. Unlike the P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. For this reason, it is typically used to value acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates. 

P/E can’t be used to value a loss-making firm. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front. 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. It can also be used to compare companies with different levels of debt.

EV-to-EBITDA is not devoid of limitations and alone cannot conclusively determine a stock’s inherent potential and future performance. The multiple varies across industries and is usually not appropriate while comparing stocks in different industries, given their diverse capital expenditure requirements.

Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.

Story Continues

Screening Criteria

Here are the parameters to screen for bargain 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 50,000: 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 17 stocks that passed the screen:

HighPeak Energy is engaged in the production of oil, natural gas and NGL reserves. This Zacks Rank #1 stock has a Value Score of A. 

HighPeak Energy has an expected year-over-year earnings growth rate of 156.7% for 2025. The Zacks Consensus Estimate for HPK’s 2025 earnings has been revised 93.3% upward over the past 60 days.

BJ's Restaurants owns and operates a chain of high-end casual dining restaurants in the United States. 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.

BJ's Restaurants has an expected year-over-year earnings growth rate of 17.7% for 2025. The consensus estimate for BJRI’s 2025 earnings has been revised 14.6% upward over the past 60 days.

PRA Group is a global financial and business services company in the Americas, Australia and Europe. This Zacks Rank #1 stock has a Value Score of B. 

PRA Group has an expected year-over-year earnings growth rate of 26.3% for 2025. The Zacks Consensus Estimate for PRAA’s 2025 earnings has been revised 12.4% upward over the past 60 days.

AZZ is a global provider of metal coating services, welding solutions, specialty electrical equipment and highly engineered services. This Zacks Rank #2 stock has a Value Score of A.

AZZ has an expected year-over-year earnings growth rate of 13% for fiscal 2025. AZZ beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters at an average of 15.2%.

ADT provides security and automation solutions for homes and businesses. This Zacks Rank #2 stock has a Value Score of A.

ADT has an expected year-over-year earnings growth rate of 10.7% for 2025. The Zacks Consensus Estimate for ADT’s 2025 earnings has been revised 1.2% higher over the last 60 days.

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

BJ's Restaurants, Inc. (BJRI):Free Stock Analysis Report

PRA Group, Inc. (PRAA):Free Stock Analysis Report

AZZ Inc. (AZZ):Free Stock Analysis Report

ADT Inc. (ADT):Free Stock Analysis Report

HighPeak Energy, Inc. (HPK):Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research

View Comments