Price-to-earnings (P/E) is hands down the most commonly used metric in the value investing world. This straightforward, easy-to-calculate ratio enjoys greater popularity among valuation metrics in the investment toolkit and is preferred for identifying bargain stocks. A widely favored approach by value investors is to chase stocks with a low P/E ratio. But even this ubiquitously used valuation multiple has a few downsides.
While P/E enjoys great popularity among value investors, a less-used and more complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA provides a clearer view of a company’s valuation and earnings-generating potential by taking a broader approach to assessing value.
Ultrapar Participacoes S.A. UGP, Chatham Lodging Trust CLDT, Arcos Dorados Holdings Inc. ARCO, Occidental Petroleum Corporation OXY and Kohl's Corporation KSS are some stocks with impressive EV-to-EBITDA ratios.
Why EV-to-EBITDA is a Better Alternative?
Also dubbed as the enterprise multiple, EV-to-EBITDA is 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. In essence, it represents a company's total value. EBITDA, the other element, gives a clearer picture of a company’s profitability by removing the impact of non-cash expenses such as depreciation and amortization that dampen 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 that 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 with 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.
Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired results.
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 50,000: 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 18 stocks that passed the screen:
Ultrapar Participacoes is one of the largest distributors of liquefied petroleum gas in Brazil and a leading producer of petrochemicals and chemicals. This Zacks Rank #1 company has a Value Score of A.
Ultrapar Participacoes has an expected year-over-year earnings growth rate of 189.7% for 2026. The Zacks Consensus Estimate for UGP's 2026 earnings has been revised 7.7% upward over the past 60 days.
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 #2 company has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chatham Lodging Trust has an expected year-over-year earnings growth rate of 32.4% for 2026. The consensus estimate for CLDT’s 2026 earnings has moved up 1.5% 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 #2 company has a Value Score of A.
Arcos Dorados Holdings has an expected year-over-year earnings growth rate of 207.7% for 2026. The Zacks Consensus Estimate for ARCO’s 2026 earnings has been revised 3.9% upward over the past 60 days.
Occidental Petroleum is an integrated oil and gas company with significant exploration and production exposure. This Zacks Rank #2 company has a Value Score of A.
Occidental Petroleum has an expected year-over-year earnings growth rate of 190.9% for 2026. The consensus estimate for OXY's 2026 earnings has been revised 5.6% upward over the past 60 days.
Kohl’s is a U.S.-based department store retailer, offering moderately priced apparel, footwear and accessories for women, men and children, along with beauty and home products. This Zacks Rank #2 company has a Value Score of A.
Kohl’s has an expected year-over-year earnings growth rate of 29.6% for the current fiscal year. The Zacks Consensus Estimate for KSS’ current fiscal-year earnings has been revised 52.2% higher over the past 60 days.
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Kohl's Corporation (KSS): Free Stock Analysis Report
Occidental Petroleum Corporation (OXY): Free Stock Analysis Report
Chatham Lodging Trust (REIT) (CLDT): Free Stock Analysis Report
Ultrapar Participacoes S.A. (UGP): Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).