4 Stocks That Flaunt an Impressive Interest Coverage Ratio

Given the current scenario, investors should gauge the changing market dynamics and accordingly chalk out a sturdy investment strategy. Well, you can decide to buy or sell a particular stock by looking at its sales and earnings numbers. However, such a strategy does not always warrant superior returns when the market faces a myriad of issues. A critical analysis of the company's financial background is always required for a better investment decision.

Indeed, 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.

Halozyme Therapeutics, Inc., Leidos Holdings, Inc. LDOS, Atmos Energy Corporation ATO and Addus HomeCare Corporation ADUS are four stocks with an impressive interest coverage ratio.

Why Interest Coverage Ratio?

The interest coverage ratio is used to determine how effectively a company can pay the interest charged on its debt.

Debt, which is crucial for most companies to finance operations, comes at a cost called interest. Interest expense has a direct bearing on a company's profits. The company's creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the essential 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.

An 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. 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.

What's the 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 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. 

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 15 stocks that qualified the screening:

Halozyme Therapeutics, a biopharma technology platform company, has a VGM Score of B and sports a Zacks Rank #1.

HALO has a trailing four-quarter earnings surprise of 9.4%, on average. The Zacks Consensus Estimate for Halozyme Therapeutics' current financial year sales and EPS suggests growth of 19.3% and 40.8%, respectively, from the year-ago period. The stock has gained 24% in the past year.

Leidos Holdings, which provides services and solutions in the defense, intelligence, civil and health markets in the United States and internationally, sports a Zacks Rank #1 and has a VGM Score of B.

The Zacks Consensus Estimate for Leidos Holdings' current financial year sales and EPS suggests growth of 5.4% and 22.5%, respectively, from a year ago. Leidos Holdings has a trailing four-quarter earnings surprise of 23.5%, on average. The stock has rallied 46.5% in the past year.

Atmos Energy, engaged in regulated natural gas distribution and pipeline and storage businesses, carries a Zacks Rank #2 and has a VGM Score of B. Atmos Energy has a trailing four-quarter earnings surprise of 3.3%, on average.

The Zacks Consensus Estimate for Atmos Energy's current financial year sales and EPS suggests growth of 6.9% and 11%, respectively, from the year-ago period. The stock has risen 7.9% in the past year.

Addus HomeCare offers home care services, specializing in personal care to support daily living activities, alongside hospice and home health care services. The stock carries a Zacks Rank #2 and has a VGM Score of B.

The Zacks Consensus Estimate for Addus HomeCare's current financial year sales and EPS suggests growth of 6.5% and 9.2%, respectively, from the year-ago period's levels. ADUS has a trailing four-quarter earnings surprise of 11.5%, on average. The stock has rallied 24.5% in the past year.

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.

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