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The EV/EBITDA ratio is frequently used as a valuation metric by value investors; in fact, we have used it in a number of our prior articles. Another value strategy involves looking for companies whose net-net working capital (Current Assets - Total Liabilities) is less than a company's market cap. However, I have not seen a formal screen that combines these two methodologies and create a ratio with:

Market Capitalization - Current Assets + Total Liabilities

as the numerator and EBITDA as the denominator. This is similar to Enterprise Value, but also subtracts out other current assets like Receivables and Inventory and adds non-debt liabilities like Payables to the numerator.

Our Screener.co stock screener lets you create custom formulas like this and use them in your value screens. For the sake of our initial application of this ratio, let's use the following conditions:

Field

op

Criteria

Exchange Traded On

!=

"Over The Counter"

(Market capitalization - Total Current Assets(NYSE:I) + Total Liabilities(I) ) / EBITDA(A)

<

3

Country Located In

!=

"China"

EBITDA(A)

>

0

(Total Current Assets(I) - Total Liabilities(I))

>

0

As of 4/7/2011, this produces 119 results, 6 of which look particularly interesting because of their scale and/or their recognizable brands:

Symbol

Company Name

TUES

Tuesday Morning Corporation

SKX

Skechers USA, Inc.

AOL

AOL, Inc.

AEA

Advance America, Cash Advance Centers

RSH

RadioShack Corporation

TLAB

Tellabs, Inc.

Tuesday Morning (NASDAQ:TUES) was covered in our March 7th Seeking Alpha article for trading within 20% of NCAV and a 4.8x EV/EBITDA ratio. At the time, I was hesitant to take a position with respect to the company, but have continued to track it. WIth an Ev/EBITDA ratio of 4.96x today, it is still trading in the same range as it was at the beginning of March. I still think the company is worth tracking, as it has a market cap of $216M, $264M of net tangible assets, and $182M of current assets less total liabilities.

The company is heavily dependent on strong Q4 performance to drive its results, like many other retailers, so a bet on the company is a bet on strong consumer spending. As a result, I remain cautious despite the company's attractive valuation metrics. If you are more optimistic about US consumer spending, you might be more willing to pull the trigger on this one.

We also covered Skechers (NYSE:SKX) in a previous Seeking Alpha article on March 28th. At the time, it was trading at an EV/EBITDA value of 3.5x despite its high revenue growth rate. Since that time, the company share price has increased somewhat, but the company is still trading at an EV/EBITDA value of 3.7x. There is a risk that the company's rapid growth represents another footwear fad like Crocs (NASDAQ:CROX), so I remain cautious despite the extremely attractive valuation metrics.

AOL (NYSE:AOL) is an internet access provider turned online content company. This is truly a tale of two businesses, with the cash-cow access business in precipitous decline as the company is trying to pivot and become a professionally produced content business anchored by the recent acquisitions of Huffington Post and TechCrunch and substantial investments in its hyperlocal journalism brand Patch. Despite the company's ambitious turnaround and 2.0x EV/EBITDA ratio, my personal opinion is that the company is doomed to be a shadow of its former self as the access business continues to shrink far faster than the content business can grow. This may be a classic value trap - or an interesting deep-value play if you don't share my highly negative outlook for the company.

Advance America (NYSE:AEA) is a short term consumer lender that offers payday loans through its retail establishments. Though the payday lending business model continues to come under fire for its high interest rates, and the long-term growth prospects for the business are hindered by this difficult regulatory environment and an economic recovery that may reopen the credit markets to subprime borrowers, the companies' financial performance and valuation metrics are compelling.

The company's revenue has shrunk for two consecutive years but the business remains highly profitable on both a net income and cash flow basis. The company is valued at an EV/EBITDA ratio of only 3.8x and is yielding a healthy 4.8%, according to Yahoo Finance. The company's operating cash flow is even higher than its EBITDA, with operating cash flow of over $134M in the last year relative to $107M of EBITDA. I continue to track the company but have been too concerned with the regulatory threat to make a play here.

RadioShack (NYSE:RSH) has certainly seen better days. It is trading at an EV/EBITDA ratio of 3.65x and has actually grown revenue each of the last two years. The company has a healthy balance sheet with net tangible assets of $720M and more current assets than total liabilities (meeting our screener condition). Analysts are predicting growth for 2011 and 2012 according to Yahoo Finance and, to top it all off, the company is yielding 1.7%. There are other attractively valued companies in retail, like BBY and TGT, which we discussed previously.

I'm sure there are bargains to be had in retail but I am personally taking a wait and see attitude to see which companies appear to be the best opportunities. If I had a larger portion of my portfolio uninvested, I might consider spreading my bet across a number of retailers that meet certain valuation and growth thresholds. A screen that could potentially be used to define those criteria will be presented in an upcoming article.

Tellabs (NASDAQ:TLAB) makes hardware and software for communications (wireless and wireline) companies. The company is trading at an EV/EBITDA ratio of just 2.76x. With over $1.5B of net tangible assets and current assets less total liabilities of over $1.1B, the company has a very strong balance sheet for a firm with a total market cap of under $2B. It is also yielding 1.5%. However, analysts are expecting negligible earnings for 2011 and an EPS of only $0.08 for 2012, according to Yahoo Finance. With such a poor outlook, it is not surprising that the company is trading at a low multiple of its trailing earnings. As a result, Tellabs is not making its way to my watchlist.

Source: 6 Companies for Value Investors to Consider