7 Stocks With Exciting Interest Coverage Ratio To Buy Now

A layman might get himself trapped if he decides to pick a stock only by looking at its shooting numbers in a real-time stock screen. A critical analysis of the company’s financial background is always required for a better investment decision.

Often investors evaluate a company’s performance by simply looking at its sales and earnings, which sometimes do not reveal the true picture. To be more precise, they do not tell whether a company’s fundamentals are sound enough to meet its financial obligations. Here the role of coverage ratios comes to play — the higher these are the more efficient an enterprise will be in meeting its financial obligations.

Why Interest Coverage Ratio?

Interest Coverage Ratio is used to determine how effectively a company can pay the interest charges on its debt.

Debt, which is very important for financing operations for a majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. And the company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, Interest Coverage Ratio is one of the important criteria to factor in before making any investment decision.

Formula: Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense. The "Interest Coverage Ratio” suggests how many times the interest could be paid from earnings and also gauges the margin of safety a firm possesses 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 in repaying debt. A company that is capable of generating earnings well above its interest expense can withstand financial hardships. 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.

The Winning 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 7 of the 20 stocks that qualified the screening:

Sanmina Corporation (NASDAQ:SANM) , the provider of integrated manufacturing solutions, components, products and repair, and logistics, has a Zacks Rank #1 and a VGM score of “A”. The expected EPS growth rate for 3–5 years currently stands at 17.5%.

Altisource Portfolio Solutions S.A. (NASDAQ:ASPS) , which operates as a marketplace and transaction solutions provider for the real estate, mortgage, and consumer debt industries, has a Zacks Rank #1 and a VGM score of “A”. The expected EPS growth rate for 3–5 years currently stands at 20%.

Lowe's Companies, Inc. (NYSE:LOW) , a home improvement retailer has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years currently stands at 15.6%.

Packaging Corporation of America (NYSE:PKG) the manufacturer and seller of containerboard and corrugated packaging products has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is currently 11.4%.

Vail Resorts Inc. (NYSE:MTN) , which through its subsidiaries operates mountain resorts and urban ski areas, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is presently 14.1%.

Euronet Worldwide, Inc. (NASDAQ:EEFT) , the provider of payment and transaction processing and distribution solutions to financial institutions, retailers and individual consumers, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is pegged at 14.8%.

McGrath Rentcorp (NASDAQ:MGRC) , a business to business rental company, has a Zacks Rank #2 and a VGM score of “A”. The expected EPS growth rate for 3–5 years is pegged at 10%.

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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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