There is not much clue, as of now, to how the stock market is going to behave in the second half of 2022. Truly speaking, things haven’t changed much or improved for the best in the past six months. Risk appetite has almost dried up, as investors are walking a tight rope. The Russia-Ukraine conflict, supply chain bottlenecks and soaring inflation are all to blame. At present, addressing shooting commodity prices is of top priority for the Federal Reserve, and it is treading the path of a rate hike to tame the same.
Given the current scenario, investors should gauge the changing market dynamics and accordingly chalk out a sturdy investment strategy. You can simply arrive at a decision to buy or sell a particular stock by looking at its sales and earnings numbers. But such a strategy does not always warrant superior returns when the market is facing myriad issues. A critical analysis of the company’s financial background is always required for a better investment decision.
Well, a company should be sound enough to meet its financial obligations. This can be judged with coverage ratios — the higher these are the more efficient an enterprise will be in meeting its financial obligations. Here we have discussed one such ratio called the interest coverage ratio.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.
Debt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profits of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.
The interest coverage ratio suggests the number of times interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.
An interest coverage ratio lower than 1.0 implies that the company is unable to fulfill its interest obligations and could default on repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardship. Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.
Avis Budget Group, Inc. CAR, Stride, Inc. LRN, BorgWarner Inc. BWA and National Storage Affiliates Trust NSA are four stocks with an impressive interest coverage ratio.
What’s the Strategy?
Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.
Interest coverage ratio greater than X-Industry Median
Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.
5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks that have a strong EPS growth history.
Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.
Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.
VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are our four picks out of the 13 stocks that qualified the screening:
Avis Budget, a leading global provider of mobility solutions, which has a Zacks Rank #1 and a VGM Score of A. Its expected EPS growth rate for three-five years is 19.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Avis Budget Group’s current financial year sales and EPS suggests growth of 23.1% and 73.9%, respectively, from the year-ago period. Avis Budget has a trailing four-quarter earnings surprise of 102.1%, on average. The stock has rallied 111.9% in the past year.
Stride, a technology-based education company, has a Zacks Rank #1 and a VGM Score of A. The expected EPS growth rate for three-five years is 20%.
The Zacks Consensus Estimate for Stride’s current financial year sales and EPS suggests growth of 7.6% and 48%, respectively, from the year-ago period. LRN’s has a trailing four-quarter earnings surprise of 28.8%, on average. The stock has jumped 27.5% in the past year.
BorgWarner, which provides solutions for combustion, hybrid, and electric vehicles worldwide, has a Zacks Rank #2 and a VGM Score of A. The expected EPS growth rate for three-five years is 29.4%.
The Zacks Consensus Estimate for BorgWarner’s current financial year sales suggests growth of 5.9% from the year-ago period. BWA has a trailing four-quarter earnings surprise of 33.1%, on average. The stock has declined 28.1% in the past year.
National Storage Affiliates, a real estate investment trust focused on the ownership, operation and acquisition of self-storage properties, has a Zacks Rank #2 and a VGM Score of B. The expected EPS growth rate for three-five years is 8.9%.
The Zacks Consensus Estimate for National Storage Affiliates’ current financial year sales and EPS suggests growth of 33.4% and 25.7%, respectively, from the year-ago period. NSA has a trailing four-quarter earnings surprise of 4%, on average. The stock has fallen 6.9% in the past year.
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 backtest 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.
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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.
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Avis Budget Group, Inc. (CAR) : Free Stock Analysis Report
BorgWarner Inc. (BWA) : Free Stock Analysis Report
Stride, Inc. (LRN) : Free Stock Analysis Report
National Storage Affiliates Trust (NSA) : Free Stock Analysis Report
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