You can simply arrive at a decision to buy or sell a particular stock by looking at its sales and earnings numbers. But such a strategy does not always warrant superior returns when the market is facing myriad issues. A critical analysis of the company’s financial background is always required for a better investment decision. Well, a company should be sound enough to meet its financial obligations. This can be judged with coverage ratios - the higher these are the more efficient an enterprise will be in meeting its financial obligations. Here we have discussed one such ratio called the interest coverage ratio. Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.Ĭambium Networks Corporation CMBM, ExlService Holdings, Inc. KEYS are four stocks with an impressive interest coverage ratio. The interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.ĭebt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on the profits 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. The interest coverage ratio suggests the number of times interest could be paid from earnings and also gauges the margin of safety a firm carries for paying interest.Īn 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 hardship. Interest coverage ratio greater than X-Industry Median Definitely, one should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over a period of time.Īpart 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. Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.ĥ-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.Īverage 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.
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