BOOT & 3 Other Stocks With Strong Interest Coverage to Buy Now

Relying solely on stock price movements without understanding the company’s fundamentals can cause investors to lose money. Investors must carefully review a company's financial health to make informed decisions, especially in today’s unpredictable market. While sales and earnings are often the go-to metrics, they can sometimes be misleading and may not show whether a company has the financial strength to cover its obligations. This is where the coverage ratio holds the key.

Boot Barn Holdings, Inc. BOOT, Brinker International, Inc. EAT, Tapestry, Inc. TPR and Cardinal Health, Inc. CAH boast impressive 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 14 stocks that qualified the screening:

Boot Barn Holdings, a leading lifestyle retailer of western and work-related footwear, apparel and accessories for men, women and children, sports a Zacks Rank #1 and has a VGM Score of B. BOOT has a trailing four-quarter earnings surprise of 4.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Boot Barn Holdings’ current financial-year sales and EPS indicates growth of 17.6% and 26%, respectively, from the year-ago period. The stock has gained 36.2% in the past year. 

Brinker International, one of the leading casual dining restaurant companies, sports a Zacks Rank #1 and has a VGM Score of A. The company has a trailing four-quarter earnings surprise of 8.2%, on average. 

The Zacks Consensus Estimate for Brinker International’s current financial-year sales and EPS calls for growth of 7.9% and 19.8%, respectively, from the year-ago period. The stock has declined 3.6% in the past year. 

Tapestry, a house of iconic accessories and lifestyle brands, sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 12.8%, on average. 

The Zacks Consensus Estimate for Tapestry’s current financial-year sales and EPS implies growth of 9.6% and 23.7%, respectively, from the year-ago period. TPR has a VGM Score of B. The stock has soared 72.8% in the past year. 

Cardinal Health, a global healthcare company that distributes pharmaceuticals, manufactures and supplies medical and laboratory products, carries a Zacks Rank #2 and has a VGM Score of A. CAH has a trailing four-quarter earnings surprise of 9.3%, on average. 

The Zacks Consensus Estimate for Cardinal Health’s current financial-year sales and EPS indicates growth of 16.5% and 25.1%, respectively, from the year-ago period. The stock has surged 74.8% in the past year. 

You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. You can also create your own strategies and back test them first before taking the investment plunge.

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This article originally published on Zacks Investment Research (zacks.com).

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