20 Important Metrics When Analyzing a Stock

[00:00:00] This is the Canadian Investor where you take control of your own portfolio and gain the confidence

[00:00:07] you need to succeed in the markets.

[00:00:10] Hosted by Braden Dennis and Simon Belanger

[00:00:15] The Canadian Investor podcast, welcome into the show.

[00:00:19] My name is Braden Dennis.

[00:00:21] As always joined by Captain All Time High's Simon Belanger as the market rolls on.

[00:00:29] You know, just this is the month you stay invested right?

[00:00:34] Like calendar year means nothing.

[00:00:38] The market doesn't care.

[00:00:40] It's forward looking and this is why you stay invested at all times.

[00:00:44] Yeah, I mean I stay like I'm mostly invested right but I would say I'm 90% invested right

[00:00:51] now and yeah I continue buying dollar cost average mostly through index funds but I

[00:00:57] start a couple new positions.

[00:00:59] I talked about it well one new position, Termalign and you know you can go back to last episode

[00:01:05] for more details on that but yeah I mean it just shows to stay invested and not panic.

[00:01:11] I mean you can always position your portfolio in a way that you'll benefit depending on

[00:01:16] what happens.

[00:01:18] That's right.

[00:01:19] This is an episode that I think will be well received from many and it is us going through

[00:01:28] metrics and numbers that we use when we're researching a company.

[00:01:35] And we're gonna kind of go back and forth on some of them.

[00:01:39] I'm gonna structure mine like top to bottom on the platform, why now I'm on the Finchrop

[00:01:46] platform because I do use it for my research.

[00:01:49] What I kind of look for, what I go through top to bottom, which metrics I always look

[00:01:54] at and some examples and some nuance kind of in the conversation and explaining what

[00:02:00] those metrics are.

[00:02:01] Now I know many folks listening to the show who have been a long time listener, first

[00:02:07] time callers will know these metrics well but it doesn't hurt to get solidifying on

[00:02:13] them by listening to the pod.

[00:02:16] If you're new to the show, we get lots of new listeners on the pod this time of year.

[00:02:20] It's good to get kind of a foundation of the numbers we talk about so that this doesn't

[00:02:26] sound like rocket science because it really isn't.

[00:02:31] There's a lot of time in financial media and news, multiple words that get used for the

[00:02:35] same concept and metric that you probably learned in grade seven math.

[00:02:41] So it doesn't have to be overwhelming.

[00:02:44] Anything else you want to add to this conceptually?

[00:02:47] No, I think that's a great overview and I mean we'll go over it.

[00:02:51] Obviously for some people are a bit more seasoned.

[00:02:53] A lot of this they'll be familiar with but I think it's a good refresher.

[00:02:57] I mean even as we were at least as I was doing my notes just a good refresher to

[00:03:02] go over these metrics and some of them I use a lot more than others just because

[00:03:07] they apply to most companies and some are slightly more specific to certain

[00:03:11] type of companies but I think that's where it'll be very useful for people is they

[00:03:16] may hear certain types of metrics and just to take that into context and

[00:03:22] understand that depending on the metrics some may apply to a certain

[00:03:26] type of company and some may not.

[00:03:28] That's right and it's not like a fully exhaustive list and there's

[00:03:32] new ones to this biz but it's kind of like a 90-10 principle here.

[00:03:38] It's like 10% of the metrics that have like 90% of the effectiveness and like

[00:03:43] 90% of what we're actually looking at every time.

[00:03:46] Like metrics that no matter what the company maybe with the exception of banks

[00:03:51] because they don't have like gross margin and EBITDA and those kinds of things

[00:03:55] with the exception of that like we're looking at these for every single company.

[00:04:00] All right, do you want to kick us off first here?

[00:04:02] Yeah and just before I last thing I'll add here is like a couple points.

[00:04:06] So valuing a company is definitely more art than science and it's important to

[00:04:11] look at several metrics when doing a dive into a company and not just one like

[00:04:15] price earnings because that's the most common one I think that we heard at

[00:04:19] least on mainstream financial media.

[00:04:22] And I always look to compare a company to its peers to get a better sense of

[00:04:27] the metrics and also look back at itself on historical basis that

[00:04:32] provides some more perspective.

[00:04:33] And again, the metrics are just part of the investment understanding the

[00:04:37] company how it works its sector, its history management and all these

[00:04:41] different things that you can't necessarily get from a metric is as

[00:04:46] equally important if not more.

[00:04:48] That's right.

[00:04:49] And like so many of these we talk about you'll hear like synonyms of them.

[00:04:55] So we'll do our best to try to talk about like the synonym of them.

[00:04:58] Like, you know, people say eight times earnings, eight X PE forward versus

[00:05:05] trailing, you know, an eight X multiple.

[00:05:09] All of those can be, you know, generally speaking, the same exact

[00:05:14] thing in conversation.

[00:05:15] And so we'll do our best to specify that.

[00:05:18] Yeah.

[00:05:18] So my first one here is market cap and EV or enterprise valuation.

[00:05:24] So they definitely go hand in hand.

[00:05:26] Market cap is useful because it gives you the total market value of the company.

[00:05:30] You simply take the number of shares outstanding and multiply them by

[00:05:34] the price of a share.

[00:05:36] And for enterprise value, use the market cap and then subtract any

[00:05:40] cash on its balance sheet and add in debt that they would have.

[00:05:45] So just looking at EV and comparing to the market cap, you can

[00:05:49] essentially know whether the company has more like is in a net

[00:05:54] cash position or net debt position.

[00:05:57] Just looking at these two.

[00:05:58] So that's something I like to look at because as a glance, it'll give me

[00:06:02] just a quick overview of what kind of the asset mixes of the company

[00:06:07] and the actual like value of the company.

[00:06:10] Yeah, good call.

[00:06:10] I mean market caps probably one of the things we always use to

[00:06:15] describe a company to get a quick gauge of its size.

[00:06:18] I'm going to use two company examples because they're so contrasting

[00:06:23] during my segments today, which is Microsoft versus BRP ticker DOO on

[00:06:28] the TSX, the Bombardier Rec products versus Microsoft.

[00:06:33] We're talking about a three trillion.

[00:06:35] So 3,000 billion market cap versus seven billion in market cap.

[00:06:41] Just to give you the range here and I've chose these ones as well

[00:06:46] because one's fully richly valued and one trades at much

[00:06:50] deep lower multiple.

[00:06:51] So I think that that's a good comparison.

[00:06:54] Enterprise value for those people to just think about it.

[00:06:57] If you're new to the metric is the reason people use it so much.

[00:07:02] Simone, if I was to buy your business and I was to take on all

[00:07:06] the debt, then I would take on all that net debt.

[00:07:09] What is that total amount?

[00:07:10] So say you have, you know, the business is

[00:07:15] 2.7 million, but you have 300 K of debt.

[00:07:19] I'm taking on basically a transaction that involves, you know,

[00:07:22] 3 million here in this in this in this quick maths example.

[00:07:26] Yeah, no, exactly.

[00:07:27] So and now the next one here, I referenced it earlier price to earnings.

[00:07:31] So you compare the market cap of the company versus its total earnings.

[00:07:35] You can also do it on the share price basis earnings versus earnings

[00:07:39] per share basis.

[00:07:40] It's going to add up to the same thing.

[00:07:43] If you're new when we say earnings, it means, you know,

[00:07:46] it's same thing as net profit, net income.

[00:07:49] These are all synonyms, probably the most common metric.

[00:07:52] You'll see it when it comes to valuation.

[00:07:54] Like I said, it's constantly cited by, you know, financial media.

[00:07:59] It does have a lot of limitation.

[00:08:01] That's because earnings can be, you know, lack of better words,

[00:08:04] kind of manipulated with accounting.

[00:08:07] There's also some non cash items that show up.

[00:08:10] So, you know, it can vary substantially from a year to year basis.

[00:08:14] You also have to be careful when looking at price to earnings or earnings in general,

[00:08:19] because most of the time it's based on the trailing 12 months.

[00:08:22] So the company might look like it's cheap on a price to earnings ratio

[00:08:26] because it had really high profits in the last 12 months.

[00:08:29] But in reality, things are slowing down and the forward looking P is actually

[00:08:35] much higher since the profits are going down.

[00:08:37] So you have to keep that in mind.

[00:08:39] And I think that's a common more beginner mistake.

[00:08:42] And if you want to sound smart to someone that doesn't know too much about investing,

[00:08:47] but has heard the price earnings ratio, talk about earnings yield.

[00:08:53] Earnings yield is just the same thing.

[00:08:56] You just inverse it and it's a percentage instead of being kind of

[00:09:00] a solid number, a non decimal number.

[00:09:03] Yeah, good call out there.

[00:09:05] When people say free cash flow yield or earnings yield,

[00:09:08] it's just those price to earnings or price to free cash flow, respectively

[00:09:14] one divided by that number.

[00:09:16] Yeah, you just fled the denominator and the numerator.

[00:09:19] That's it. Yeah.

[00:09:20] But you can sound a lot smarter on TV if I'm talking about a free cash flow yield.

[00:09:25] I like that.

[00:09:26] What I'll add here is when it comes to valuation metrics,

[00:09:30] it's not hard nowadays to just get it, check out what forward multiples look

[00:09:34] like based on next year's estimates for well covered companies from analysts.

[00:09:40] They are estimates, don't get me wrong.

[00:09:43] But it gives you it gives you that second check, as Simone was mentioning.

[00:09:48] Say we're talking about a cyclical that looks super cheap on last year's

[00:09:52] trailing earnings and analysts are pricing in a really bad year next year.

[00:09:58] You might see why it's cheap.

[00:10:00] Right. So it's not the be all end all of like, oh,

[00:10:03] it's going to be trading at 23 times next year's enterprise value to EBITDA.

[00:10:10] But it gives you kind of that second gut check.

[00:10:13] And that's when forward estimates and forward multiples are super useful.

[00:10:18] So I'm always looking at those.

[00:10:20] The one metric I like doing broad based comps on is enterprise value divided

[00:10:26] by EBIT, so it's earning for interest in taxes, very similar to operating earnings.

[00:10:32] So enterprise value by operating earnings.

[00:10:35] It's really nice for screening across, you know, a lot of companies and getting

[00:10:40] some sort of normalized version of what these companies might look like.

[00:10:44] Yeah, no, well put.

[00:10:46] So that's a great one as well.

[00:10:49] Now to go back kind of on the same team price of free cash flow, very similar

[00:10:53] to price earnings, this one simply compares the price of company versus

[00:10:58] its free cash flow.

[00:10:59] Free cash flow is the cash from operating activities that you'll find on the cash

[00:11:04] flow statement minus the capital expenditures, or you may hear people say cap X.

[00:11:10] This can be found, like I said, on the cash flow statement.

[00:11:12] I find this useful because it does remove non cash items from the calculation

[00:11:17] and shows what you are paying for the actual cash that the company is generating.

[00:11:22] Yeah, nothing to add there for me.

[00:11:25] I would say when it comes to free cash flow in general and like what you're going

[00:11:32] to talk about next free cash flow per share is just remember, it's not as smooth.

[00:11:38] You have a huge cap X hit like you get a company like Amazon that's hiding

[00:11:44] tons, hiding tens of billions of dollars in free cash flow by with with huge

[00:11:50] cap X spends over the last few years.

[00:11:52] And so it can be a little confusing for beginners.

[00:11:55] So it's just best to kind of understand how capital

[00:11:57] expenders work into that calculation if you're going to be using free cash flow.

[00:12:02] But it is like finance nirvana, especially when you're talking about

[00:12:06] growth, intrinsic value growth of the company is like free cash flow per share.

[00:12:11] Yeah.

[00:12:12] And I think to add to that is something with free cash flow too.

[00:12:15] It can be really lumpy on a quarter to quarter basis.

[00:12:18] Best use on their longer time frame, I would say at least on a yearly basis or even

[00:12:24] a longer time frame.

[00:12:25] I mean that same would kind of go with earnings sometimes depending on the business.

[00:12:29] Right. If you have a retailer that does most of its sales in the last quarter

[00:12:34] of the year because it's the holiday season coming up, clearly the free cash

[00:12:38] numbers or the earnings won't look that great.

[00:12:42] The first three quarters of the year and then they're going to look

[00:12:45] amazing the last quarter.

[00:12:46] So you have to make sure you also understand the business when looking at these numbers.

[00:12:51] And know what the metric should be specifying, depending on the platform

[00:12:54] you're using like on FinChat, it'll say next 12 months, NTM or trailing 12 months,

[00:13:00] which will include those four last quarters for a company like you're

[00:13:03] talking about a retailer there to kind of smooth it out.

[00:13:06] Yeah, exactly.

[00:13:07] And to stay, I guess, on the free cash flow theme here,

[00:13:10] I love looking at free cash flow per share.

[00:13:13] I essentially take the free cash flow generated and divided by the total number

[00:13:17] of shares. This is most useful because it takes into account share dilution.

[00:13:22] You'll find that companies that increase this over time will usually provide

[00:13:26] very good returns to shareholder.

[00:13:28] I really like this metric.

[00:13:30] It's one that I always look at for all the companies I invested,

[00:13:33] especially on a long time horizon, just seeing the free cash flow per share

[00:13:38] evolution. I mean, people say, you know, stocks follow earnings.

[00:13:42] I think that that's right.

[00:13:43] An even better version of that is stocks follow free cash flow per share over a

[00:13:48] long enough time horizon like that's that's ultimate gravity there.

[00:13:53] Looking at growth here, what are you looking at?

[00:13:56] Yeah, go for it.

[00:13:57] I know you had highlighted some things.

[00:13:59] So revenue growth, obviously, is really important.

[00:14:02] Probably one of the first things you should be looking at in terms of

[00:14:06] when you're looking to invest in business, you want to elaborate on that bit?

[00:14:09] It's the first thing I look at.

[00:14:12] You know, with every company, once I figure out like what do they do?

[00:14:17] Like what is the one liner for like what this company does if I'm completely

[00:14:22] new to the name? Second was like, is this company growing the top line?

[00:14:27] Because that's just a filter for me.

[00:14:29] Like I'm not looking to dumpster dive into things that aren't growing.

[00:14:34] I'm looking to be a quality growth investor generally.

[00:14:38] If I was to summarize that.

[00:14:39] And so I'm looking at, you know, how has the growth been lately on like one year,

[00:14:45] three year, five year, 10 year and beyond growth over time?

[00:14:49] Typically like on a compound annual growth rate.

[00:14:52] And then I want to actually see that

[00:14:54] graphed out, which is super easy to do on the platform.

[00:14:57] You just click revenues and you'll see over time.

[00:14:59] You'll see if the revenues are cyclical.

[00:15:01] Like you toggle the quarterly and like you're saying, you just see that huge

[00:15:05] December spike or, you know, if it's a travel company, that huge summer spike.

[00:15:10] So just that can tell you a lot about the business in one chart.

[00:15:15] You know, is this a growing company?

[00:15:16] Is it a shrinking company?

[00:15:18] And that's going to that's going to actually help me figure out.

[00:15:22] That's going to be more instructive about the company from a valuation

[00:15:27] perspective too, with that context in mind.

[00:15:29] Like the reason you and I were so bearish on Blackberry was

[00:15:34] it wasn't cheap at all.

[00:15:36] If you consider that the company was shrinking,

[00:15:39] you know, maybe it's a cheap multiple, but a cheap multiple for a growing business

[00:15:43] is maybe more expensive than a rich multiple for a growing company,

[00:15:48] especially if your time horizon is beyond three, five years.

[00:15:52] And so just to give you some idea with Microsoft here,

[00:15:55] they have a five year competitive growth rate on the top line of 13.7 percent.

[00:16:01] That's kind of in the sweet spot for a lot

[00:16:03] of these like high quality compounders, these big companies that just seem to just

[00:16:07] kind of grow double digits just from pricing power every single year over a year.

[00:16:12] So in that kind of like low teens number 13.7 for Microsoft,

[00:16:16] that number for BRP is 16.72 percent.

[00:16:21] Again, a lot more cyclical of a company.

[00:16:24] And that's why, for instance, the PE forward on Microsoft is 38.4 today.

[00:16:31] PE forward on BRP is 10.2.

[00:16:35] So, you know, a world of a difference.

[00:16:38] Both are growing companies, which I think is the important part,

[00:16:42] but how the market views them and how it views that the revenue chart.

[00:16:48] It's fair, right?

[00:16:50] Like one goes up every quarter, no matter what.

[00:16:54] No, and the other one doesn't.

[00:16:56] Investors like the one that always goes up no matter what.

[00:16:59] Yeah, exactly.

[00:17:00] And you know, for people that are again a bit newer here, when we say top line,

[00:17:05] that's a synonym for revenue or sales.

[00:17:08] I mean, I'm already drinking the Kool-Aid.

[00:17:10] Yeah, exactly. Thank you for going that out.

[00:17:13] Yeah, another one for net profits or net income or earnings would be the bottom line.

[00:17:18] So it's just the way the financial statements kind of go.

[00:17:21] That's a term you'll see pretty often.

[00:17:24] So just something I wanted to specify.

[00:17:27] Now, the next one I'll look at is profit margin.

[00:17:30] So there's a few different ones you can look at here,

[00:17:32] but I'll kind of focus on two gross profit margin is the first one.

[00:17:36] This simply compares the sales to the cost of goods sold.

[00:17:40] So COGS and nothing else.

[00:17:42] So the cost of goods sold is the cost related to making the product or

[00:17:46] producing the service and nothing else.

[00:17:48] The operating profit margins compares the sales to the operating profit.

[00:17:53] The operating profit, like Braden said, is a synonym to e-bits or earnings before

[00:17:59] interest in taxes and it just includes more expenses related to the company than

[00:18:04] COGS or cost of goods sold.

[00:18:06] So I like to look at both because what we've seen, especially after 2021,

[00:18:11] is you had these great companies that were or, you know,

[00:18:14] you had these companies that were generating fantastic gross margins.

[00:18:20] And those gross profit margins were great.

[00:18:23] But then we saw as, you know, inflation picked up is OK,

[00:18:28] maybe they were able to get these margins, but then the operating profits were really

[00:18:34] taking a hit and those margins were taking a big hit.

[00:18:36] So that's why I think it's important to look at both and not,

[00:18:40] you know, focus too much on just one or the other, just taking both into consideration.

[00:18:45] Yeah, that's right.

[00:18:46] And this is a perfect example of two companies for me to compare.

[00:18:49] So you can see a stark contrast in the margin profile when it comes to

[00:18:53] profitability of a tech company with global distribution versus a manufacturing

[00:18:58] company with high COGS and high operating profits.

[00:19:02] So when I say COGS, cost of goods sold.

[00:19:05] So gross margins, I'm always looking at that's like a seven is close to 70

[00:19:10] percent on Microsoft compared to 25 percent on BRP.

[00:19:15] Microsoft has a operating margin of 43 and a half percent compared to 13 and a half

[00:19:21] percent for BRP, so you can see, you know, stark contrast.

[00:19:25] If you're talking about operating profit, basically talking about like a three

[00:19:28] and a half four X increase to Microsoft, there's a sorry,

[00:19:34] Microsoft has on BRP.

[00:19:35] There's a reason that people like these very scalable tech companies that have

[00:19:41] basically no increased costs as they gain customers.

[00:19:46] And that's why people like software as a service so much.

[00:19:50] It's why people like Visa and MasterCard so much.

[00:19:53] You know, once that network set up, you can realistically achieve like 60

[00:19:57] percent free cash flow margins, which is not a number that you just hear

[00:20:01] on planet Earth very often.

[00:20:03] So these are kind of one in one in a kind metrics.

[00:20:07] Yeah, no, exactly.

[00:20:08] And now the next one here moving on to price to book.

[00:20:11] So this is when you'll hear pretty often.

[00:20:14] So this is based on the book value, which is what you get if you sold all

[00:20:19] the assets of a company paid off the debt, the remaining amount would be the

[00:20:23] book value. Now, the price of book compares

[00:20:26] the market cap of the company versus the book value.

[00:20:29] And it is a useful metric for asset heavy businesses and financial companies.

[00:20:36] So that's why if you ever look at, you know, Berkshire Hathaway and with Warren

[00:20:40] Buffett, when he's looking at buybacks, he'll often mention the price to book

[00:20:45] ratio. I think it's like 1.3, 1.35 is kind of his,

[00:20:50] you know, his price point to start making buybacks if it dips below that.

[00:20:55] But these I think price to book is really important that it is useful only

[00:20:59] for a certain type of businesses.

[00:21:00] If you look at the tech company, it just I mean, it's not very valuable

[00:21:05] in my opinion, in terms of giving you some perspective.

[00:21:09] And this is why it was one of the holy grails of valuation metrics.

[00:21:15] You know, in the times of Ben Graham writing, you know, the intelligent investor

[00:21:20] by stocks at, you know, less than one time's book and less than 15 PE.

[00:21:26] You wouldn't be buying many stocks these days with those metrics.

[00:21:30] And the reason for that is you just explained it.

[00:21:33] These were balance sheet heavy companies where this metric was important.

[00:21:38] It's so skewed with the S&P 500 today, like

[00:21:42] when you have Facebook and Nvidia being, you know, massive Google,

[00:21:49] these asset-like companies with gigantic market caps, it's just going to skew

[00:21:55] the entire index in terms of price to book.

[00:21:58] So I pretty much only look at that metric when I'm looking at Berkshire banks.

[00:22:05] Like, that's that's basically the only time that I look at it.

[00:22:09] Yeah, exactly.

[00:22:10] I think yeah, it's just Berkshire banks, you know, utilities, stuff like that.

[00:22:15] Like anything that has a lot of assets, it'll be a useful metric.

[00:22:19] Not like you said as useful as it used to be and on a broad basis,

[00:22:23] but definitely something to be aware of and something to keep in mind if

[00:22:27] you're interested in those kind of businesses.

[00:22:29] Now, the next one here, I know a lot of people like dividends.

[00:22:32] So dividend yields and buyback yields.

[00:22:35] I'll do them all at once because they're just essentially returning money to

[00:22:39] shareholder. Now, the dividend yield is the yearly dividend paid per share

[00:22:43] divided by the share price.

[00:22:45] Keep that in mind because sometimes you'll see a company that will pay

[00:22:49] dividends four times a year.

[00:22:51] So you just have to make sure that you have a look at that dividend

[00:22:54] multiplied by four if it's only the quarterly dividend you're looking at.

[00:22:59] The buyback yield is the amount of money spent on buybacks versus the market cap

[00:23:05] of the company at the beginning of the period, typically done on a year basis.

[00:23:10] And if you see a negative buyback yield, it just means that the share count has

[00:23:14] increased. That's why I like this metric because you can actually have a look

[00:23:18] and get a quick idea of what's going on share count wise.

[00:23:22] So the buyback yield is something definitely interesting.

[00:23:25] And I think they should be looked at in a similar fashion because they do.

[00:23:29] It does look at the amount of money they're returning to shareholders.

[00:23:33] Yeah, we added shareholder yield, buyback yield, some other payout ratio type metrics.

[00:23:41] I'd have to look at all the yields we added recently on FinCHA.

[00:23:46] Of course, the dividend yield earnings yield, debt pay down.

[00:23:49] Yeah, all this stuff is now in the platform.

[00:23:52] It's super helpful, especially shareholder yield.

[00:23:56] You add kind of all those things up together and you get some representation

[00:24:02] of what shareholders have been paid through capital allocation, whether it be

[00:24:06] share buybacks or paying out that div.

[00:24:09] One thing I really want to mention is if check at the actual dividend

[00:24:14] history when looking at the dividend yield, if the calculation is including a

[00:24:19] special div that can lead you astray.

[00:24:22] Like say you just got that Costco, you know, it's a Costco div,

[00:24:27] that special dividend and you're looking at the yield and it's a lot higher on

[00:24:31] a chilling 12 months and then they might not pay that for 34 years.

[00:24:35] That that special div.

[00:24:37] So just just check at the actual history and see what's being calculated in there.

[00:24:42] This is an outside case.

[00:24:44] Most companies don't pay special dividends, but just a caveat to look at that.

[00:24:49] Yeah, exactly.

[00:24:50] So not much more to add there.

[00:24:53] Now, the next one here I have is the dividend payout ratio.

[00:24:57] So obviously this only applies to dividend, but this compares the amount

[00:25:01] of dividend that has been paid out versus net incomes or you can use a free

[00:25:07] cash flow as well or both.

[00:25:08] So I like to look at what the payout ratio is on an earnings basis,

[00:25:12] but also on a free cash flow basis.

[00:25:14] This is one metric that you should always and I don't know if I can say that.

[00:25:20] And let's just say in caps, always, always, always look at when investing

[00:25:24] in a dividend company, especially if you're banking on the dividend income.

[00:25:28] But even if you're not, you should always have a look at the dividend

[00:25:32] payout ratio because this will tell you whether, you know,

[00:25:36] the company will be able to continue paying the dividend forward if there's any

[00:25:41] kind of margin of safety, because if you have a company paying out 90,

[00:25:46] 95 percent of its free cash flow, I mean,

[00:25:49] there's a good chance that they're not going to be able to sustain that for

[00:25:53] a long period of time.

[00:25:54] Maybe they'll use debt to be able to do it.

[00:25:57] But as a more longer term investment,

[00:26:00] that could be a big red flag if you're banking in on the dividend for part

[00:26:04] of your returns.

[00:26:06] Yeah, good call.

[00:26:07] There's so many companies that fall into this.

[00:26:10] There's there's a reason they're called dividend traps because they

[00:26:15] they literally trap investors with a high yield.

[00:26:18] One thing I do want to mention here is that you can look at it on a free

[00:26:21] cash flow basis and if you're looking at a REIT,

[00:26:26] I suggest using payout ratio with adjusted funds from operations instead

[00:26:32] of earnings for many accounting reasons that I don't need to explain right here

[00:26:38] on the podcast right now.

[00:26:39] But if you're looking at a real estate investment trust,

[00:26:41] adjusted funds from operations is in my opinion like the most useful metric

[00:26:47] just broadly, you'll see that metric a lot on like Brookfield companies as

[00:26:51] well, because they're so capex intensive and

[00:26:55] I know they do have that rent component in there.

[00:26:58] So just just a little thing to look out there for for you.

[00:27:02] Yeah, yeah, definitely.

[00:27:03] And I mean, I think REITs are and those kind of companies are a bit of different

[00:27:08] so that we could probably do an episode eventually on just just those and how

[00:27:12] they're different and why there are these different metrics that are to be used

[00:27:16] here and in terms of the ones I'm looking at and there's other ones too.

[00:27:20] I wanted to add one that was a bit more towards the debt.

[00:27:23] So EBITDA to interest coverage ratio.

[00:27:26] So this compares the earnings before interest taxation, depreciation

[00:27:31] and amortization, so EBITDA to the interest payment.

[00:27:35] So that's extremely important if you're looking at a company with debt.

[00:27:38] I like to come.

[00:27:40] I like to use this and compare it to their peers.

[00:27:43] But also I like to see how it's evolved because especially right now in a rising

[00:27:48] rate environment, if you see that the interest coverage ratio as really

[00:27:53] increase over the last little while, there's really two things that could have

[00:27:57] happened. First, the amount of debt hasn't really changed, but they have a lot

[00:28:02] of revolving debt or variable debt.

[00:28:05] They're all synonyms.

[00:28:06] So that's something to be aware because if interest rates keep rising,

[00:28:10] then those costs will increase.

[00:28:12] Or the other one is they have fixed debt, but they've increased the

[00:28:17] amount of debt that they have.

[00:28:18] Therefore, they've also increased the amount of interest payment.

[00:28:21] And comparing to EBITDA makes it a good comparator because you have an idea

[00:28:27] how much it is covered.

[00:28:29] So the higher the number, obviously the better because you want it to be as like,

[00:28:34] you know, again, you want a margin of safety in place.

[00:28:37] If you're looking at a coverage ratio that's close to one,

[00:28:42] there's definitely some alarm bells that should start going off in your head

[00:28:45] because there's really not much flexibility there for the company.

[00:28:50] Most of their money, most of their profits are generating.

[00:28:55] I know it's not net income, but most of the profits are actually going to servicing that debt.

[00:29:00] Yeah. And I'll add there on the balance sheet.

[00:29:03] I also want like beyond just ratio.

[00:29:06] I basically don't care about nominal amounts whatsoever, like, you know,

[00:29:11] amount of revenue because that's relative to like, you know, how big the company is.

[00:29:15] One, two things that I really care about just nominal amounts on the balance sheet.

[00:29:20] It's just pure cash.

[00:29:22] Regardless of how big the company is, just how much actual cash do they have sitting on the balance sheet?

[00:29:29] And you'll see that in as cash, a cash equivalence and in nominal again,

[00:29:34] debt coming due and interest payments that that they that they have.

[00:29:40] These are basically the only time I'm like looking at just nominal, not ratio amounts

[00:29:46] where I really want to understand what it is and wrap my head around it.

[00:29:49] And that can give them some margin of safety and give you an idea of the balance sheet.

[00:29:54] And, you know, especially if they're dividend payers or, you know, what the

[00:29:59] capital allocation might look like in the future.

[00:30:01] So I definitely want to look at that.

[00:30:03] You'll see these like absurdly giant cash piles for big tech and Berkshire in there as well.

[00:30:09] One thing that I just wanted to kind of circle back on, I have two more metrics here.

[00:30:14] But I also wanted to give us some framework on revenue growth.

[00:30:18] Just to circle back a little bit, because I think it's so important of like,

[00:30:22] where do I screen?

[00:30:25] Do I buy companies, you know, only growing 20 percent over year over year?

[00:30:29] Like how growthy are you going to get?

[00:30:33] And the reason I screened personally at eight percent revenue growth is

[00:30:39] back of the envelope math, which I think gets you to a really good place

[00:30:44] as you go like real return X inflation plus a little bit of pricing power baked in.

[00:30:52] Anything beyond that, you can find real organic growth.

[00:30:56] So you have a little modest amount of pricing power built in over time.

[00:31:01] You know, they're passing on inflationary costs.

[00:31:04] That basically gets you to eight back of the envelope, depending on where inflation is at.

[00:31:09] Anything beyond that, you can generally find organic growth or acquisitive growth.

[00:31:15] So the company is actually growing that top line without like these external factors

[00:31:20] and just passing on modest pricing power over time, which are fine.

[00:31:24] And it's good that they pass those on to those customers.

[00:31:27] But that's why I screened typically at eight and above in terms of returns.

[00:31:33] We didn't talk much about return on equity or return on invested capital.

[00:31:37] Return on invested capital is looked at as like the holy grail metric for investors.

[00:31:43] You know, Charlie Munger, as always said, you can't really achieve a return

[00:31:48] greater than the return on invested capital over time.

[00:31:51] And so you'll find companies that can sustain

[00:31:55] to what is terrific is like sustained median over 20 percent return on invested capital.

[00:32:03] Those are fantastic companies.

[00:32:05] I'm just looking here, five year average Microsoft's at 28 percent.

[00:32:09] BRP is at 20.7 percent.

[00:32:11] Just, you know, phenomenal.

[00:32:13] There's a couple of different ways to calculate return on invested capital.

[00:32:17] I just use the most standard no-pat

[00:32:20] calculation which you can look up because you can get pretty into the weeds

[00:32:25] on this calculation.

[00:32:26] But to give you an idea of what this is, is how good the company is.

[00:32:32] If we're to just really think of an analogy of return on invested capital,

[00:32:37] is you want I give you a dollar

[00:32:40] into your business machine and you print out a dollar 20.

[00:32:45] It shows that the company is efficient at taking capital and creating value with it.

[00:32:51] Just on a broad understanding of the metric.

[00:32:56] And if you think about that conceptually,

[00:32:58] that's why it's so important and that's why people care about it so much.

[00:33:01] So you'll see that return on invested capital or ROIC

[00:33:05] commonly referenced for companies.

[00:33:08] Anything to add there?

[00:33:09] Yeah, just because no-pat people may be wondering what that is.

[00:33:13] So that's net operating profit after tax.

[00:33:16] So just wanted to clarify that.

[00:33:18] But yeah, ROIC is definitely one of the top metrics to look at.

[00:33:22] If you want to see how efficient or how good they are at investing capital.

[00:33:27] And it's really important, typically the one I will look at as well.

[00:33:30] The reason I didn't add it on my list because I saw you added on yours.

[00:33:33] OK, there you go.

[00:33:34] I'll leave him a few and then chime in afterwards.

[00:33:37] Well, perfect.

[00:33:38] Because now I have I'm going to talk about three or four more kind of nuanced

[00:33:43] stuff, industry stuff and company specific stuff in terms of examples.

[00:33:48] So just quickly on the balance sheet net debt to EBITDA.

[00:33:52] You mentioned a similar metric there.

[00:33:55] Long term debt to equity and then EBIT to interest expense.

[00:33:59] You know, again, very similar.

[00:34:00] I think you had EBITDA.

[00:34:02] I generally broad scanning the market.

[00:34:07] EBIT is the number that I really like to use.

[00:34:10] That's earnings before interest and taxes.

[00:34:13] Industry stuff.

[00:34:14] So what I will do is I'll make a little comp sheet.

[00:34:19] So you pick on the company.

[00:34:20] I used MasterCard for this example.

[00:34:23] And I just wanted to compare, you know, what MasterCard metrics look

[00:34:28] like compared to Visa, Discover and American Express to get kind of a lay of the land.

[00:34:35] So you go on MasterCard on FinCiat, you press industry,

[00:34:38] you can adjust the companies and you can adjust the metrics.

[00:34:41] So what I just did here is I selected Marquee Cap revenue on a five year

[00:34:45] trailing company and your growth rate, price to earnings, forward price

[00:34:49] to earnings and net margin.

[00:34:51] The reason I use net margin is because I want to see it all fall through.

[00:34:57] And these companies are different.

[00:34:59] For instance, American Express, since it is a bank and operates differently,

[00:35:05] it doesn't have a gross margin.

[00:35:07] This is where these kinds of like this is where these episodes you actually

[00:35:11] get like these little nuggets of like useful information.

[00:35:14] Because when I was starting out, I would have thought to myself,

[00:35:19] the system's broken.

[00:35:20] It's not showing gross margin for AMEX.

[00:35:22] The AMEX operates as a bank and they don't calculate gross margins.

[00:35:26] And so that's why you'll see that.

[00:35:29] So I'm throwing in net margin.

[00:35:31] When you compare them, you get a net margin for MasterCard of 45 percent,

[00:35:36] fifty three percent for Visa, twenty two and a half percent for Discover

[00:35:41] and fifteen percent for AMEX.

[00:35:43] So you can see a massive range there and I can sort them.

[00:35:47] If I look at how they've grown, they've grown from those companies have

[00:35:52] grown from around eight and a half percent to eleven percent

[00:35:55] and very, very similar.

[00:35:57] MasterCard has the edge on Visa on growth a little bit.

[00:35:59] And you can see that come out in the forward multiple.

[00:36:02] Visa trades at a twenty seven times next year's price to earnings.

[00:36:05] And MasterCard trades at thirty two.

[00:36:07] So the market thinks that MasterCard's growth internationally will continue

[00:36:12] to outpace visas, but just slightly like it's not like the multiples double.

[00:36:18] It's just a little bit higher.

[00:36:21] And so they mostly trade on very similar numbers.

[00:36:24] KPIs, now this is where I think real research is done on a company by company basis.

[00:36:31] I'm going to use Netflix as an example.

[00:36:34] OK, if you know the company well,

[00:36:38] think of a company like you might have worked at or maybe even a company run.

[00:36:43] There's a good chance you don't think of your business or value it or,

[00:36:48] you know, your main milestones or targets is around earnings per share.

[00:36:54] I'm going to I'm going to strongly,

[00:36:56] you know, confidently say that if you run like an auto shop,

[00:37:00] you don't report back to your wife on your earnings per share or your husband

[00:37:04] on earnings per share.

[00:37:06] You probably talk about, you know,

[00:37:08] profitability or even the car's serviced.

[00:37:11] OK, like how many people were getting through the door?

[00:37:13] Netflix in Q2 of twenty twenty two.

[00:37:17] You see, you remember that day when they dropped their QT report twenty twenty two?

[00:37:21] Was it when their users are?

[00:37:23] Yeah, it would have been Russia.

[00:37:26] Yes, pulling the Russian invasion, their users dropped.

[00:37:29] Right. Yeah. That's right.

[00:37:30] And so I grafted out the kind of total here.

[00:37:34] You want you can drive this the screen here for joint TCI subscribers.

[00:37:38] They went from two hundred and twenty two million global

[00:37:41] subscribers to two hundred and twenty one. Not a huge deal.

[00:37:45] But it was the first time this company reported a net loss of subscribers,

[00:37:52] which sent the stock down, I think, thirty six percent.

[00:37:57] If I remember correctly, it was in the high mid to high thirty percent

[00:38:01] drop in the stock price on release of their earnings and revenue is up.

[00:38:07] Like all the kind of traditional financial metrics were up.

[00:38:12] But it was the first time that Netflix subscribers

[00:38:16] had had a little bit of adversity and there was the Russia thing that occurred.

[00:38:22] So they lost a bunch of subscribers.

[00:38:23] They weren't serving Russia anymore.

[00:38:25] So that got factored in.

[00:38:27] But panic on the streets, Netflix lost subscribers for the first time.

[00:38:31] Is the growth dead?

[00:38:33] Right. And so then boom, the company's valuation gets slashed.

[00:38:37] And so this is an example where nothing else really matters other than this graph.

[00:38:43] If you're on joint TCI dot com right now, watching us on the Patreon.

[00:38:47] This is a one chart business.

[00:38:49] This is the only chart that matters for this company, for my view.

[00:38:54] And it's the only chart that management really cares about,

[00:38:57] which is driving subscriber growth over time.

[00:39:01] So that's an example of a KPI.

[00:39:03] Let's compare that on an industry comp.

[00:39:05] Simon, I have here average ticket.

[00:39:09] If you scroll down, average ticket for lows versus Home Depot.

[00:39:13] So you can see that average ticket for lows is typically around like eight bucks more

[00:39:19] on checkout in 2012, it was fifty five bucks for Home Depot and it was sixty three

[00:39:26] bucks for lows. So that just means like the average customer,

[00:39:29] what they're ringing up at the teller that has grown over time tremendously

[00:39:34] for these companies, it's a hundred and three point six in the end.

[00:39:39] Twenty twenty two year ending and ninety point four for Home Depot.

[00:39:43] So they've even extended that gap a little bit,

[00:39:45] but both numbers have grown at around five point one percent year over year over that

[00:39:50] time frame, time frame.

[00:39:52] So there's an example of like, I think Home Depot is a better business,

[00:39:56] but like I don't really have any stats on that.

[00:39:59] Like I don't know.

[00:40:01] Like I have to dig into the numbers.

[00:40:02] This is a perfect example of like I want to compare the KPIs and I want to see it

[00:40:06] visually, like it's one thing to have it in a table, but I want to actually see

[00:40:10] that evolution over time.

[00:40:12] Yeah, and I mean, obviously on here, lows is doing better than Home Depot,

[00:40:17] but it's growing at pretty much at the same pace.

[00:40:19] And I, you know, obviously I know Home Depot and I'm pretty familiar with

[00:40:24] lows, I am not going to go much on a limb to say that Home Depot makes up

[00:40:29] for it by traffic and volume compared to lows.

[00:40:33] And so it's just just an example here.

[00:40:36] But no, I think that's great when you look at, especially in this case,

[00:40:39] it's essentially, I mean, it's essentially a duopoly.

[00:40:43] And then you have a lot of little fragmentation with smaller players.

[00:40:47] Right.

[00:40:48] And I can also compare like selling square feet,

[00:40:52] you know, like total number of stores, you know,

[00:40:56] and get kind of an understanding of where they differ, where they're the same.

[00:41:01] I know they do roughly the same thing, right?

[00:41:04] But if I'm if I'm making a decision,

[00:41:06] if I'm not doing the I'm just going to own both of them and can sleep well at

[00:41:11] night and I want to pick one, I would want to kind of understand

[00:41:15] the nuances of those businesses.

[00:41:17] And so I don't own either of them.

[00:41:18] So I have no real hot take here.

[00:41:20] None of this is advice, of course.

[00:41:22] But I'd want to I'd want to understand these things over time.

[00:41:25] And that's why I talk about like KPI is both on a company level and on an industry

[00:41:30] comparative level.

[00:41:31] No, no, I think that's a great point.

[00:41:33] Yeah.

[00:41:33] Well, folks, thanks for listening.

[00:41:36] That is a good roundup of stuff that we're just kind of always looking at.

[00:41:41] Quick glance.

[00:41:42] And yes, there's a lot to digest.

[00:41:46] There's a lot here.

[00:41:47] But it's one of those things where

[00:41:50] you get really quick.

[00:41:51] Like I could probably do all of those things on a sophisticated platform like

[00:41:56] FinCHA in maybe five to 10 minutes.

[00:42:00] You know, like that's not deep research or anything, but I'm at least understanding

[00:42:04] those metrics, how big the company is, how profitable is it growing?

[00:42:10] Are the return numbers nice like on a ROE or ROIC?

[00:42:16] What are the competitors look like?

[00:42:18] Are they growing faster or slower?

[00:42:20] What are the KPIs?

[00:42:21] I can realistically get.

[00:42:24] I can go from like zero to one in like 10 minutes and then like one to ten is

[00:42:30] like buying the position that's going to take me.

[00:42:32] Sheesh, sometimes years if you know me,

[00:42:36] but I can get from zero to one pretty quick.

[00:42:38] Yeah.

[00:42:39] And I think it's a good starting point and it's just a starting point.

[00:42:43] Looking at these metrics, I think it can easily weed out some bad investment

[00:42:48] without too much effort.

[00:42:49] And then if you do like what you're seeing at a first land, then you can start

[00:42:53] digging into more into the annual statements, start listening to some

[00:42:57] conference call, hear what management are saying.

[00:43:00] You can look at Glassdoor to have a sense of employees are actually liking

[00:43:05] the business and they like working there because that's usually a sign

[00:43:09] that they're treated well, which they'll usually perform better.

[00:43:12] You can start looking.

[00:43:14] We talked about debt, like how the debt is structured.

[00:43:17] There's all these different things to keep looking at once you've gone that

[00:43:22] initial stage. This is just a starting point, but I think that starting point

[00:43:27] can save you a lot of time versus just digging through the financial statement

[00:43:31] and realizing like five hours in like, OK, I don't really like what I'm seeing.

[00:43:38] So I just wasted five hours.

[00:43:39] Instead, you look at these metrics and you can save yourself a lot of time

[00:43:44] when you're just on the initial stages.

[00:43:47] You know how many like click revenue, see the revenue evolution over the last 10

[00:43:53] years and backscroll I do on a new name because I just don't buy shrinking value

[00:44:01] ideas no matter how compelling they are.

[00:44:05] Even if it's trading less than a cash position,

[00:44:08] like it's never enticing enough for the way that I invest.

[00:44:13] So for the way that you want to invest and as you get familiar,

[00:44:17] and a lot of people listening to this podcast are very familiar and they're

[00:44:20] listening to this and they know a lot of this stuff.

[00:44:23] This is how you can now build screens as well.

[00:44:26] Some complex screens on like, OK, I'm looking for companies that meet criteria

[00:44:31] X, Y and Z, you can literally do that with AI now.

[00:44:33] Like I want companies that create trading X, Y and Z.

[00:44:37] Say you're looking for opportunities like in Canada, like mid caps in Canada.

[00:44:41] I think there's so many.

[00:44:43] There's perennially great ideas between like 500 mil and a billion in market cap

[00:44:50] on the TSX of profitable growth companies with global exposure.

[00:44:56] Maybe that's a really good hunting ground.

[00:44:58] Like screen Canada, screen growth, screen profits, screen dilution, screen.

[00:45:06] Trying to think of some other stuff like balance sheet.

[00:45:08] Like you could you could put up a screen for figuring out a universe of ideas

[00:45:13] to dig through in again, five, ten minutes.

[00:45:17] I would I would suspect.

[00:45:18] Yeah, no, well put.

[00:45:20] Yeah, if you have not checked out the

[00:45:22] Patreon that is at join TCI dot com.

[00:45:25] And for those who are maybe getting into the real estate game,

[00:45:33] maybe you have bought your first house.

[00:45:36] Maybe you're looking at buying your first house.

[00:45:38] Maybe you are a landlord or maybe you are thinking of becoming a landlord.

[00:45:44] The Canadian real estate investor podcast, which you can find on your

[00:45:48] in your podcast player there is like our sister show.

[00:45:52] They talk strictly about real estate.

[00:45:55] Dan and Nick know what they're talking about.

[00:45:57] These guys are like celebrities on TV all of a sudden now all the time.

[00:46:00] Like they're getting the call from all the big networks.

[00:46:05] And when you're as handsome as they are, that it makes a lot of sense.

[00:46:08] That is the Canadian real estate investor podcast.

[00:46:12] You can go check that out for now.

[00:46:14] We will see you in a few days.

[00:46:16] We are here Mondays and Thursdays all year long.

[00:46:19] Take care. Bye bye.

[00:46:20] The Canadian investor podcast should not be taken as investment or financial

[00:46:25] advice, Braden and Simone may own securities or assets mentioned on this podcast.

[00:46:31] Always make sure to do your own research and do diligence before making

[00:46:35] investment or financial decisions.