In a market shaped by shifting macroeconomic 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. U.S. equities delivered mixed performance on Monday as investors balanced geopolitical developments, commodity moves and expectations around a major technology earnings event.
The Dow Jones Industrial Average gained 140.16 points, while the S&P 500 and Nasdaq Composite slipped 21.51 and 200.31 points, respectively, as technology stocks faced pressure ahead of NVIDIA Corporation’s (NVDA) earnings report. A decline in oil prices provided some relief to bond markets by easing concerns over rising yields, even as investors assessed Washington’s intensified economic pressure campaign against Iran.
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.
Garrett Motion Inc. GTX, Brinker International, Inc. EAT, Vertiv Holdings Co VRT and Mueller Water Products, Inc. MWA 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 17 stocks that qualified the screening:
Garrett Motion, a global leader in differentiated turbocharging and electrification technologies for mobility and industrial applications, carries a Zacks Rank #2 and has a VGM Score of A. GTX has a trailing four-quarter earnings surprise of 16.8%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Garrett Motion’s current financial-year sales and EPS calls for growth of 7.2% and 25.7%, respectively, from the year-ago period. The stock has soared 94.9% 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 6.2%, on average.
The Zacks Consensus Estimate for Brinker International’s current financial-year sales and EPS indicates growth of 7.7% and 20.6%, respectively, from the year-ago period. The stock has advanced 56.9% over the past year.
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.
The Zacks Consensus Estimate for Vertiv Holdings’ current financial-year sales and EPS implies growth of 36.6% and 58.1%, respectively, from the year-ago period. The stock has soared 99.3% over the past year.
Mueller Water Products, a leading manufacturer and marketer of products and solutions used in the transmission, distribution and measurement of water, carries a Zacks Rank #2 and has a VGM Score of B. The company has a trailing four-quarter earnings surprise of 13.2%, on average.
The Zacks Consensus Estimate for Mueller Water Products’ current financial-year sales and EPS suggests growth of 3.5% and 16.8%, respectively, from the year-ago period. The stock has fallen 7.3% over the past year.
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Brinker International, Inc. (EAT): Free Stock Analysis Report
MUELLER WATER PRODUCTS (MWA): Free Stock Analysis Report
Garrett Motion Inc. (GTX): Free Stock Analysis Report
Vertiv Holdings Co. (VRT): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).