Must have Investing Ratios for Any Value Investor

What are the best investing metrics

What are the best investing metrics | Flickr: Hades2K

Here are the best investing metrics and ratios that I refer to quite often in my stock analysis and stock valuations. It’s more than 15 since I grouped a few but who’s counting. I’ve also left out all but a few single line financial statement items such as inventory or long term debt. You would be here all day if I included everything I looked at as the list would go on and on.

1. Three Stock Valuation Methods – Are these the Best Investing Metrics?

“Price is what you pay, value is what you get.” In other words, price determines value. It’s important to know what price to pay based on what the valuation is. So are these three the best investing metrics? Let’s take a closer look.

Always with a healthy margin of safety.

2. Tangible Book Value and NNWC

Tangible book value is a great way to view the asset value of the company at it’s face value. A share price made up of a lot of tangible assets will provide downside protection. Intangibles are never easy to value especially if it consists of patents, goodwill and other intellectual property.

Net Net Working Capital. Even better than tangible book value because you adjust the balance sheet items to properly reflect the company. The most accurate liquidation value analysis to date. No one can beat Benjamin Graham when it comes to asset based valuation and balance sheet analysis .

3. Free Cash Flow (FCF) Growth

Growth rate over a rolling 5 year or 10 year history using the median. Provides smoothing of FCF to determine how the company has grown intrinsically.

4. Cash Return on Invested Capital (CROIC) Growth

A way to determine how much cash a company can make off every dollar it invests into its operations. I was first introduced to the concept of CROIC by F Wall Street and it has been an invaluable tool ever since. Love it.

The growth rate is determined by using the median of rolling 5 and 10 year medians.

5. FCF to Sales

The two ratios above show companies that can deliver strong FCF growth but that shouldn’t be where it ends. A marginally profitable company could be an even better investment if the company can product solid cash flow for each dollar of sales. FCF/sales will show you how profitable the company really is. i.e generating excess cash.

Even simpler, it shows the amount of sales converted to FCF.

6. Cash From Operations Growth

The growth is again computed based on a rolling 5 year and 10 year multiple timeframes. Cash from operations as well as the value of growth is then compared with how net income has pared over time. Should be parallel otherwise it signals an accounting red flag .

7. Earnings Yield

Popularized by Joel Greenblatt’s Magic Formula Investing .

Earnings Yield = Net Profit / Market Cap or P/E upside down

Earnings yield shows the percentage of each dollar invested in the stock that was earning by the company. Good way to compare to the treasury or bond yields to determine the attractiveness of an investment.

Same concept to earnings yield. Recently started looking at this number after I read it in F Wall Street and Value Investor Today mentioned it.

The common formula is

FCF Yield = FCF/Market Cap

but I use

FCF Yield = FCF/Enterprise Value

as it includes debt, value of preferred shares and minority interest and subtracts cash and equivalents which more accurately values a business. Look for higher yields.

9. Price to FCF

Great for multiples based stock analysis. Self explanatory.

Rather than using EV/EBITDA or PE, I prefer EV/FCF. Always best to use FCF or owner earnings since that is what I view as the real earnings to a company.

In case you haven’t noticed, this is the inverse of FCF yield.

11. ROA, ROE, Margins

Self explanatory but it helps me to see the company strategy, especially if they have a long history. I’m sure you know already but WalMart and Costco are perfect examples where margins and management returns show what type of strategy they employ. Retail are the easiest to figure out as well.

12. Inventory Turnover & Receivables Turnover

Shows how many times a company will completely turnover its inventory. Low turnover implies poor sales and/or excess inventory while high turnovers suggests strong sales or ineffective pricing. But again, it depends on what company you are looking at.

Receivables turnover shows how efficiently a company is using its assets. How effective they are in extending credit as well as collecting debt.

13. Debt to Equity

Indicates the proportion of equity and debt used to finance the company’s assets. The higher the number, the more debt the company is using and vice versa.

14. FCF to Debt

Indicator to show whether a company’s FCF can cover the debt expenses. Obviously, a higher number means that there is ample FCF from operations to cover debt and interest expenses.

I referred to this ratio and variants in my analysis of my collection of radio stocks.

15. Piotroski F-score

The only stock strategy that produced positive results in 2008. There has been some good stuff here and Greenbackd has also done a great job on his Piotroski articles as well.

Putting it All Together

What better way to wash it all down than with a list of stocks.

Click for the full view of the stock database I am beginning to build. Same as the spreadsheet below.