Must have Investing Ratios for Any Value Investor
What are the best investing metrics
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.
So here are my favorite ratios which have helped me screen investments one after the other throughout the years.
- Must have Investing Ratios for Any Value Investor
- What are the best investing metrics
- 1. Three Stock Valuation Methods – Are these the Best Investing Metrics?
- 2. Tangible Book Value and NNWC
- 3. Free Cash Flow (FCF) Growth
- 4. Cash Return on Invested Capital (CROIC) Growth
- 5. FCF to Sales
- 6. Cash From Operations Growth
- 7. Earnings Yield
- 8. FCF Yield
- 9. Price to FCF
- 10. EV/FCF
- 11. ROA, ROE, Margins
- 12. Inventory Turnover & Receivables Turnover
- 13. Debt to Equity
- 14. FCF to Debt
- 15. Piotroski F-score
- Putting it All Together
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.
8. FCF Yield
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
Putting it All Together
I hold BOLT at the time of writing.