What are we looking for?
The top Canadian value stocks, on the basis of their enterprise values to their earnings before interest, taxes, depreciation and amortization (EBITDA).
Enterprise value is an all-encompassing measure of a company’s total value. It includes the market worth of all of a firm’s common stock but also spans its net debt, minority interest and preferred shares. By comparing enterprise value to EBITDA, investors can get a sense of how long it would take a company’s cash flow to pay off the cost of the entire business, including its debt. The lower the ratio, the bigger the potential bargain.
Many investors believe that evaluating a company using EV/EBITDA is preferable to using the more traditional price-earnings ratio because it puts companies with different capital structures on a level playing field. If a firm is juicing its apparent returns to shareholders by borrowing heavily, the EV/EBITDA ratio isn’t fooled, because it includes the debt in its calculation.
More on today’s screen
We looked for the stocks on the Toronto Stock Exchange with the lowest EV/EBITDA ratios. To avoid micro-cap stocks that may be too risky for most investors, we insisted that each stock in our list had to have a market cap greater than $250-million.
What did we find?
The screen shows the 24 companies that had EV/EBITDA ratios below four.
Readers may be surprised to see the likes of Research In Motion and Air Canada at the top of the list, but it is important to remember that EV/EBITDA does not capture whether a company is making a profit after tax, or whether analysts like the company’s prospects. It simply reflects how long it would take to buy the entire business from the company’s current cash flow.
The danger, of course, is that cash flow deteriorates. Readers should bear that risk in mind. But consider the positive, too: Many takeover firms begin looking for potential acquisition targets by searching for firms with low EV/EBITDA ratios. Assuming the companies on our list can maintain their current levels of EBITDA, they pass the first test for potential acquisitors – and for discerning investors.