4 Stocks That Boast Remarkable Interest Coverage Ratio

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 — a higher ratio signals that a company is more capable of meeting its financial commitments.                                                  

Sterling Infrastructure, Inc. STRL, Stride, Inc. LRN, BJ's Wholesale Club Holdings, Inc. BJ and Philip Morris International Inc. PM have 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 12 stocks that qualified the screening:

Sterling Infrastructure, which is engaged in e-infrastructure, transportation and building solutions, sports a Zacks Rank #1 and has a VGM Score of B. Sterling Infrastructure delivered a trailing four-quarter earnings surprise of 16.2%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Sterling Infrastructure’s current financial year EPS suggests growth of 34.6% from a year ago. The stock has surged 43.5% in the past year.

Stride, a technology-based education company, sports a Zacks Rank #1 and has a VGM Score of A. LRN has a trailing four-quarter earnings surprise of 97.8%, on average. 

The Zacks Consensus Estimate for Stride’s current financial year sales and EPS implies growth of 14.9% and 48.4%, respectively, from the year-ago period. The stock has soared 107.5% in the past year. (See the Zacks Earnings Calendar to stay ahead of market-making news.)

BJ's Wholesale Club Holdings, a leading operator of membership warehouse clubs, carries a Zacks Rank #2 and has a VGM Score of B. BJ has a trailing four-quarter earnings surprise of 12%, on average. 

The Zacks Consensus Estimate for BJ's Wholesale Club’s current financial year sales and EPS indicates growth of 5.8% and 4.4%, respectively, from the year-ago period. The stock has advanced 48.3% in the past year.

Philip Morris, which operates as a tobacco company, carries a Zacks Rank #2 and has a VGM Score of B. PM has a trailing four-quarter earnings surprise of 3.6%, on average. 

The Zacks Consensus Estimate for Philip Morris’ current financial year sales and EPS suggests growth of 7.3% and 13.2%, respectively, from the year-ago period. The stock has rallied 86.1% 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. Further, you can also create your own strategies and back test them first before taking the investment plunge.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies is available at: https://www.zacks.com/performance.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

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

Zacks Investment Research