5 Rockin’ Investing Ratios and Why I Like It

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Jae Jun

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investing ratios

Investing Ratios | Flickr: psd

Here are the investing ratios, in no particular order, that I like to check in order to get a good all round picture of a company.


Here are the 5 Rockin’ Investing Ratios

Price to Book Value (P/B)

Where would a value investor like me be without the P/B ratio. It is one of the most fundamental metrics and will tell you at what level a stock is trading in relation to its book value.

You may also want to compare P/B to its P/Tangible Book Value. This will let you see whether a company is building its assets through intangibles or solid assets.

Free Cash Flow to Sales (FCF/Sales)

I first came across this metric while reading the 5 Rules for Successful Stock Investing. This investing ratio concept is very simple and powerful.

How much of sales is converted to FCF? This metric will show you.

AAPL has a TTM FCF/Sales of 0.28 = 28%


Apple is able to convert 28% of its sales into FCF.

Compare that to a company like GMCR which has a TTM FCF/Sales ratio of -0.03. In other words, GMCR is dipping into its bank account to support sales.

Cash Return on Invested Capital (CROIC)

CROIC is a fantastic metric first popularized by Joe Ponzio of F Wall Street.

You may be more familiar with ROE or ROIC to measure business returns, but CROIC takes it a step further.

CROIC shows how much free cash flow per dollar the business generates from invested capital. I find this to be the ultimate performance metric as it shows so clearly how effective management is and the strength of the business.

CROIC = FCF/Invested Capital

The higher the CROIC, the more cash the company is generating and it also indicates that the business is a profitable one. Rarely do you see a high CROIC but low or negative FCF.

Enterprise Value to Free Cash Flow (EV/FCF)

A much better alternative to PE. Another variation that you see used widely is EV/EBITDA but I have already written about the negatives of EBITDA.

Enterprise Value will give you the total valuation of a company.  i.e. it includes debt and subtracts cash. This makes it easier to compare companies in the same industry and is not skewed towards cash rich companies.

Using FCF instead of Earnings, will show you how cheap a company is in relation to its cash generating ability. Another alternative is the P/FCF ratio

Total Debt/Equity, Long Term Debt/Equity & Short Term Debt/Equity

Some ratios are better analyzed together. If you just look at one, it could be mistaken easily.

You see total debt/equity quite often and if this ratio is high, you will get the impression that the company is highly leveraged.

However if you look at Long Term Debt/Equity and Short Term Debt/Equity together, it could paint a different picture.

Company A and B may both have a a Debt/Equity ratio of 2 but company A has a long term debt/equity ratio of 1.5 compared to company B whose short term debt/equity ratio is 1.5.

Two same debt/equity ratio’s but two very different pictures.

I’m just scratching the surface with the investing ratios I use and the combinations in which it should be looked. More hopefully soon.

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10 responses to “5 Rockin’ Investing Ratios and Why I Like It”

  1. forgot to add the definition of invested capital.
    Invested Capital = BV + Total Liabilities – Current Liabilities – Excess Cash

  2. Stable Investor says:

    One of major problems with P/BV is that it depends on Book value, which can ‘adjusted’ as per accounting practice. One should always be cautious when dealing with numbers which have some sort of subjectivity attached to them.
    Great post though.

  3. Nice article. Are there any online screeners that enable you to use these metrics?

  4. Not that I know of. There metrics are usually performed by hand or through my spreadsheets.

  5. Viktor P says:


    I like your articles because they explain a lot of difficult concepts quite easily. I am trying to get into the whole concept of analyzing financial statements from the value approach but I am struggling with a few things.

    One of them is debt. If I want to determine the total amount of debt, I can just copy the number from the balance sheet. But if you read through the financial statements, you can find under the section “Liquidity and Capital Resources” the sum of all the contractual obligations, which include items like purchase agreements, operating leases, uncertain tax positions etc.
    Usually, if I increase the total debt by these items (most often not included in the balance sheet), the total debt is huge. I do not know if it is the right way to look at the total debt. But it seems to me that if a company has a contract to purchase something in the future, or to pay for something in the future, it should be considered as its debt.
    However, by this measure, I’ve come across only a few companies who meet the criteria that D/E ratio < 0,8.

    As a professional, can you tell me your take on this? Is this the right way to look at debt? Or am I overlooking something important? Am I artificially increasing the debt?

    Thank you


  6. Hi Viktor,

    Good question.

    You are on the right track.

    On the reports, there are two types of debt.
    The one that you see in the financial statements, and the extra debt that you dont see unless you read the statements.

    The easiest way to find the total number is to do a search for “off balance sheet liabilities” in the report.

    Many companies will say that there is no off balance sheet liabilities. This means you can just use the total debt.

    If a company says, they have off balance sheet liabilities, it means you should add it to the total number.

    Does that make sense?

  7. Viktor P says:

    Yes, thanks a lot. I’ve been adding the Off-Balance Sheet Debt (under the heading “contractual obligations”) to the total debt, making sure I don’t count in twice the LT debt portion and capital leases (if they are already reflected in the Balance Sheet). But I am just surprised how some companies understate the total level of debt thus calculated.

    In fact, if I want to calculate the net asset value of a company (which is, if I understand it correctly, Tangible Assets minus Total Debt) – the company ends up with a negative value.
    Surprising because that goes right in contrast with the “general market sentiment”, everything going up even though I am not sure if the bullish trend can be justified by current performance of the companies.

    Actually, I kind of wish the market would go down because I find it hard to find investment opportunities. What do you think about that, please?

  8. NAV is just asset – liabilities. By using tangible assets, you are actually calculating tangible NAV. Most companies will have a negative TNAV because companies these days are not capital intensive.

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