We often evaluate a company based on its sales and earnings performance. However, these metrics may not be sufficient on their own. A stock may receive a short-term boost when revenues and earnings increase year over year or surpass estimates in a particular quarter, creating an opportunity for investors to capitalize on the momentum. Nevertheless, relying solely on sales and earnings figures may not generate sustainable long-term returns. As investors move into the second half of 2026, persistent inflation, moderate economic growth and elevated borrowing costs continue to keep corporate debt-servicing capacity in focus.
A critical analysis of a company’s financial health is, therefore, essential for making an informed investment decision. Coverage ratios, which measure a company’s ability to meet its financial obligations, play an important role in this analysis. A higher ratio generally indicates a stronger financial position. This article focuses on the interest coverage ratio, a key metric used to assess a company’s ability to pay interest on its outstanding debt. A strong interest coverage ratio suggests that a company is not excessively leveraged and can comfortably meet its interest expenses from operating earnings.
Interest Coverage Ratio is equal to Earnings before Interest & Taxes (EBIT) divided by Interest Expense. Dell Technologies Inc. DELL, Life Time Group Holdings, Inc. LTH, Celestica Inc. CLS and Casey's General Stores, Inc. CASY have impressive interest coverage ratios.
Why Interest Coverage Ratio?
The interest coverage ratio is used to determine how effectively a company can pay the interest charges 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 a company's profitability, and its creditworthiness depends on how effectively it meets 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 the interest could be paid from earnings and 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 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 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 four of the 19 stocks that qualified the screening:
Dell Technologies, a global technology company that provides IT infrastructure, cloud computing, data storage and digital transformation solutions, sports a Zacks Rank #1 and has a VGM Score of B. DELL has a trailing four-quarter earnings surprise of 18.7%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Dell Technologies’ current financial-year sales and EPS indicates growth of 53.7% and 82.5%, respectively, from the year-ago period. The stock has soared 219.8% over the past year.
Life Time Group Holdings, the nation's premier healthy lifestyle brand, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 10.9%, on average.
The Zacks Consensus Estimate for Life Time Group Holdings’ current financial-year sales and EPS implies growth of 11.3% and 18.1%, respectively, from the year-ago period. LTH has a VGM Score of B. The stock has risen 52.7% over the past year.
Celestica, a global leader in data center infrastructure and advanced technology solutions, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 7.7%, on average.
The Zacks Consensus Estimate for Celestica’s current financial-year sales and EPS calls for growth of 55% and 68.8%, respectively, from the year-ago period. CLS has a VGM Score of B. The stock has jumped 57.6% over the past year.
Casey's, a leading convenience store chain in the United States, carries a Zacks Rank #2 and has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 18.4%, on average.
The Zacks Consensus Estimate for Casey's current financial-year sales and EPS suggests growth of 16.6% and 10.3%, respectively, from the year-ago period. The stock has advanced 63.6% over the past year.
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Dell Technologies Inc. (DELL): Free Stock Analysis Report
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Casey's General Stores, Inc. (CASY): Free Stock Analysis Report
Life Time Group Holdings, Inc. (LTH): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).