In a market shaped by shifting macroeconomic and geopolitical factors, investors should avoid relying solely on stock price movements when making decisions. Instead, reviewing a company’s fundamentals — financial strength, earnings trends and business outlook — is essential for identifying stocks that can better withstand uncertainty. Although the U.S. stock market closed higher on Friday, concerns over inflation and rising borrowing costs cannot be ignored.
Against this backdrop, assessing a company’s debt-servicing ability becomes especially important, as elevated borrowing costs can pressure profitability and financial flexibility. While sales and earnings are often the primary metrics investors track, they may not fully reflect whether a company can comfortably meet its financial obligations. This is where the interest coverage ratio becomes particularly important, as it measures how easily a company can pay interest expenses on its outstanding debt.
Dell Technologies Inc. DELL, Brinker International, Inc. EAT, Tapestry, Inc. TPR and Alcon Inc. ALC stand out for their strong 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.
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.
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 10 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 calls for growth of 50.2% and 82.2%, respectively, from the year-ago period. The stock has soared 246.2% over the past year.
Brinker International, one of the world's leading casual dining restaurant companies, carries a Zacks Rank #2 and has a VGM Score of A. EAT has a trailing four-quarter earnings surprise of 6.8%, on average.
The Zacks Consensus Estimate for Brinker International’s current financial-year sales and EPS indicates growth of 7.9% and 20.8%, respectively, from the year-ago period. The stock has advanced 12.1% over the past year.
Tapestry, the parent company of Coach and kate spade new york, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.6%, on average.
The Zacks Consensus Estimate for Tapestry’s current financial-year sales and EPS implies growth of 13.9% and 36.5%, respectively, from the year-ago period. TPR has a VGM Score of A. The stock has rallied 38.6% over the past year.
Alcon, the global leader in eye care, carries a Zacks Rank #2 and has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 3.7%, on average.
The Zacks Consensus Estimate for Alcon’s current financial-year sales and EPS suggests growth of 7.3% and 14%, respectively, from the year-ago period. The stock has fallen 22.3% over the past year.
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Dell Technologies Inc. (DELL): Free Stock Analysis Report
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Tapestry, Inc. (TPR): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).