An ill-informed investor can lose money by betting on a stock based solely on the numbers flashing across a real-time trading screen. A deeper review of a company’s financial health is therefore essential for making informed investment decisions, particularly when markets are navigating multiple crosscurrents.
Investors often assess a company’s performance by focusing primarily on headline sales or earnings. However, these figures alone do not reveal whether its underlying fundamentals are strong enough to meet financial obligations, especially in a tighter and more rate-sensitive environment.
This is where coverage ratios become particularly useful. A higher coverage ratio generally indicates a stronger ability to service debt and sustain operations, making it an important measure of financial resilience for investors looking to identify fundamentally sound opportunities. Interface, Inc. TILE, US Foods Holding Corp. USFD, Vertiv Holdings Co VRT and Ryman Hospitality Properties, Inc. RHP have impressive interest coverage ratios.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.
Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability 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.
Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.Â
The interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.
An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over 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 with 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.Â
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 four of the 16 stocks that qualified the screening:
Interface, the global flooring and sustainability leader, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 29.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for TILE’s current financial-year sales and EPS implies growth of 5.6% and 21.7%, respectively, from the year-ago period. TILE has a VGM Score of B. The stock has risen 43.8% over the past year.Â
US Foods Holding, a leading U.S. foodservice distributor that supplies fresh, frozen, dry food and non-food products, carries a Zacks Rank #2 and VGM Score of B. The company has a trailing four-quarter earnings surprise of 1.5%, on average.Â
The Zacks Consensus Estimate for US Foods Holding's current financial-year sales and EPS indicates growth of 5.1% and 16.3%, respectively, from the year-ago period. The stock has advanced 37.5% over the past year.Â
Vertiv Holdings, a global leader in critical digital infrastructure, carries a Zacks Rank #2 and has a VGM Score of B. VRT has a trailing four-quarter earnings surprise of 12.6%, on average.Â
The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS calls for growth of 36.6% and 58.1%, respectively, from the year-ago period. The stock has soared 88% over the past year.Â
Ryman Hospitality, a leading lodging and hospitality real estate investment trust, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 8.1%, on average.
The Zacks Consensus Estimate for Ryman Hospitality’s current financial-year sales and EPS implies growth of 8.4% and 7.1%, respectively, from the year-ago period. RHP has a VGM Score of A. The stock has risen 26.5% over the past year.Â
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