15 Best Investing Metrics and Ratios List

Must have Investing Ratios for Any Value Investor

What are the best investing metrics

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.

So here are my favorite ratios which have helped me screen investments one after the other throughout the years.

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.

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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

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.

10. EV/FCF

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.
OSV Stock Database PDF Version

Disclosure

I hold BOLT at the time of writing.

About Jae Jun


Jae Jun is the founder of Old School Value. He is on a mission to provide practical and actionable value investing tools, tutorials and educational material to help empower the individual investor. Keep in touch with Jae via any of the methods linked below.

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  • James

    Jae, have you read Peter Temple’s “Magic Numbers for Stock Investors”? A nice collection of 25 useful ratios, it makes a good reference book.

  • http://www.investisseurheureux.com/screener Fabrice

    My prefered ratios are EV/EBITDA and EV/SALES.

    Main pb is that ratios change a lot according to different Websites. Sometimes it is because of TTM, MRQ, etc, sometimes it is because of wrong data?

    Take Piotroski F-Score for Microsoft:

    1/9 with this source:
    http://members.cox.net/econisvoodoo/piotroski/piotroski.SP500.html

    9/9 with this source:
    http://seekingalpha.com/article/141340-piotroski-formula-yields-14-promising-investments

    5/9 with SMF Tool.

  • Saji

    Hi Jae,
    This is a long list of ratios. Which one’s do you use for scanning and which one’s do you use as part of further analysis?

    -Saji

  • Tyler

    P/e ratios are useless. basically what i want to know is how much to discount. Buffet uses 6% (long term us treasury rate)

  • http://www.oldschoolvalue.com Jae Jun

    @ James,
    Thanks, I’ll put it on my reading list. Looks good.

    @ Fabrice,
    Yes it does depend on what data you use. MRQ may be a short term view but I believe Piotroski F score is a lot like EPV in how it is supposed to measure the “now” rather than the future.

    The members.cox.net site is wrong on many accounts I believe.

    @ Saji,
    It really is hard to say. People will lean more towards different things and companies are diverse and dynamic. You just have to know which ones to use for which types of companies just like how you have to know which valuation method to use for a specific situation.

    @ Tyler,
    I didn’t mention P/E. Which one are you referring to?

  • Robert

    Thank you, Jae. This is so useful.

    However, I would like to bring up a stock I am looking at which I can’t seem to value with any of the above… so your input is greatly appreciated.

    That is of properties which produce income. I have been looking at BEE for some time and like many other stocks after the debacle, all parameters are totally skewed. About a month ago, this company sold one of their hotels (Le Parc in paris) and I thought I could use some current hard facts to try to assess value. Given that its EBITDA for the full year can also be estimated with some precision I obtained its capitalization rate using the formula {ebitda (noi) / market value} and then extrapolated such cap rate to all hotels to which I had ebitda information that I could run for the full year.

    Thus, I arrived to a fair valuation for each hotel applying the cap rate information in reverse. Then, I substracted the debt owed for each hotel and obtained a measure of equity for each. After adding all equity, I added to this balance cash on balance sheet plus cash I know will be coming in next quarter and then substracted other debt (outstanding notes and credit facility). Finally, I substracted the part corresponding to the preferred stock (currently trading at 30% par value) and reached a specified amount to be applied to the common.

    I am aware this sounds like a back of the envelope calculation but it is the only way I could obtain a somewhat precise picture. In fact, my conclusion is that the stock is probably between somewhat undervalued to very undervalued, depending on how optimistic one is. So my questions are:

    1. In times like present, where many stocks (and their parameters like revenues, profits, etc.) have collapsed and 5 years or 10 years runs would not tell the whole picture, how much weight should we give to the metrics/ratios you have listed.

    2. What is your opinion on the above evaluation for BEE? Obviously, the hotels that didn’t generate enough net operating income to cover debts in relation to the specified cap rate never made it to the equity part and were not included in the calculation (Bee had 2 hotels as such).

    Hopefully, I will learn something else. Merry Christmas to everyone.

  • Robert

    Excuse typos!

  • http://www.oldschoolvalue.com Jae Jun

    Hi Robert,

    1. The important part is to value the business in a normal scenario. Not based on a recession or even when the recession is booming. But rather in a flat, no growth scenario. So I still do weigh importance on 5yr and 10yr data as it is a good indication. Then just normalize it to ignore down cycles.

    2. That’s actually a very good method of valuing REITs. I’m not an expert on real estate myself, but I do know that each property is worth a different amount if you come to a value for each one for a normal environment rather than a recessionary valuation and the assets far outweigh the debt, then you’ve got a winner I believe. I’ve known about BEE for a while as well.

    You could also try going through Ackman’s GGWPQ presentations and value BEE with the same methods.

    I know an investor who owns BEE as well.
    http://slinj.wordpress.com/

  • Robert

    Thank you, Jae. Will look into GGWPQ presentations then and thanks for the link to the other blog. Reading it now.

  • http://valueinvestortoday.com Jim

    @Tyler,

    According to Mary Buffett, Warren uses a 10% discount rate and he changes it according to various factors. I haven’t heard of him using a 6% discount rate since the 1950′s and parts of the 60′s.

    Ben Graham used the PE ratio as a valid tool. The PE ratio is very effective if it is an ‘analyzed’ PE ratio rather than just taking the accountants word for it when they state it on the books (GAAP).
    .-= Jim´s last blog ..Delusions of Grandeur in regards to the Covestor Investment Return =-.

  • AndySykes

    Hi Jae,

    Hope you’re fine. Congrats, nice work with the site.

    I consider myself to be a rookie value investor and enjoy sites that are set to educate investors and promote intelligent investing. Thanks for your time and ideas.

    If you don’t mind, however I couldn’t help but notice one phrase you wrote and just not sure if it’s really what you meant. Quote: “Price is what you pay, value is what you get. In other words, price determines value” – Price determines value? Are you talking about investment value here or value of a business? If you think about it, your phrase sounds like – as long as something is cheap, or even dirt-cheap it has a lot of value. So the lower price you pay the more value you get? Nah.. The pile labeled “value traps” is just too big on my desk of research ideas.

    I think unless you’re a higly skilled seasoned value investor, cigar butts are better left alone. On the other hand, high quality businesses bought at attractive prices (even if not dirt-cheap by conventional measures – see Warren Buffett) can offer an investor tremendous returns. So I’d like to correct your statement as follows:

    Price in most cases determines the return you can reasonably expect your investment to deliver. Value of an ongoing enterprise on the other hand is determined by the discounted earnings (cash flows) and is only worth considering by a rational investor when these earnings are protected by a sustainable competitive advantage (aka moat with alligators). Otherwise, as honey draws bees, high returns on capital that your business delivers will soon attract loads of competitors, which will result in shrinking profitablity and lower earnings power for the business under consideration. So, I would say that business structure/nature coupled with an excellent management is what determines the value of the business and definetely not price the market quotes.

  • http://www.oldschoolvalue.com Jae Jun

    Hey Andy,

    You are absolutely correct but I do mean it when I say “price determines value”. Like you said, price determines the returns. That’s what investing is all about. I could be the owner of the best company in the world but it could be useless to me if I overpay too much.

    But by focusing too much on value, people become emotional, overpay and never sell. Sure they hold great businesses but until it makes a ROI, it’s just another value trap.

    “The lower price you pay the more value you get?” True to some degree but only if there is an underlying operating business. I didn’t bother elaborating but I would much rather buy a viable business with no moat at liquidation prices than a fair price for a great business. Just all depends on your strategy. So I’m completely the opposite of what Buffett preaches in this one.

  • Henry Cosh

    I’m quiet new to this great site and I have to admit that i’m lost with all these details. I have already purchased the premium service yesterday.
    Can you please explain to me (even by mail)the headers of the a.m sheet?
    How do I know if a stock is a buy candidate or not? Do you have an email
    to which I can send some questions I might have?

  • http://www.oldschoolvalue.com Jae Jun

    Hi Henry,

    Email is at the bottom of the page.
    But what questions do you have?

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