The price-to-earnings (P/E) ratio is widely regarded as a yardstick for assessing a stock’s fair value. It is commonly used by investors to identify attractively priced stocks. However, despite its popularity, this valuation metric has notable shortcomings.
While P/E remains the most widely used equity valuation ratio, a more comprehensive metric called EV-to-EBITDA often provides a more accurate assessment of a company’s value. Frequently considered a better alternative to P/E, this ratio delivers a clearer view of a firm’s valuation and earnings-generating potential.
Chatham Lodging Trust CLDT, Par Pacific Holdings, Inc. PARR, Arcos Dorados Holdings Inc. ARCO, Caleres, Inc. CAL and H.B. Fuller Company FUL are some stocks with attractive EV-to-EBITDA ratios.
EV-to-EBITDA Is a Better Approach, Here’s Why
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, which the P/E ratio does not. For this reason, EV-to-EBITDA is generally used to value 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.
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.
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 12 stocks that passed the screen:
Chatham Lodging Trust is a lodging real estate investment trust that invests in premium-branded upscale extended-stay and select-service hotels. This Zacks Rank #1 company has a Value Score of A.
Chatham Lodging Trust has an expected year-over-year earnings growth rate of 26.5% for 2026. The Zacks Consensus Estimate for CLDT’s 2026 earnings has moved up 1.6% over the past 60 days.
Par Pacific Holdings is a growth-oriented energy company supplying conventional and renewable fuels across the western United States. This Zacks Rank #1 company has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Par Pacific Holdings has an expected year-over-year earnings growth rate of 136.1% for 2026. The consensus estimate for PARR’s 2026 earnings has moved up 30.1% over the past 60 days.
Arcos Dorados Holdings operates as a franchisee of McDonald's. It operates the largest quick-service restaurant chain in Latin America and the Caribbean. This Zacks Rank #1 company has a Value Score of A.
Arcos Dorados Holdings has an expected year-over-year earnings growth rate of 180.8% for 2026. The Zacks Consensus Estimate for ARCO’s 2026 earnings has been revised 7.4% upward over the past 60 days.
Caleres designs, develops, sources, manufactures and distributes footwear in the United States, Canada, East Asia and internationally. This Zacks Rank #2 stock has a Value Score of A.
Caleres has an expected year-over-year earnings growth rate of 37% for the current fiscal year. The consensus estimate for CAL’s current fiscal-year earnings has moved up 3.2% over the past 60 days.
H.B. Fuller is a global formulator, manufacturer and marketer of adhesives, sealants, coatings, tapes, encapsulants and related specialty chemical products. This Zacks Rank #2 stock has a Value Score of A.
H.B. Fuller has an expected year-over-year earnings growth rate of 14.9% for the current fiscal year. The Zacks Consensus Estimate for FUL’s current fiscal-year earnings has moved up 2.1% over the past 60 days.
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Chatham Lodging Trust (REIT) (CLDT): Free Stock Analysis Report
H. B. Fuller Company (FUL): Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
Caleres, Inc. (CAL): Free Stock Analysis Report
Par Pacific Holdings, Inc. (PARR): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).