The Canadian Investor - 10 metrics that will help you pick stocks

Episode Date: February 15, 2021

In this week’s episode, we talk about some recent earnings releases and news. We then talk about 10 metrics worth looking at when looking to start a position in a company. Tickers of stocks discussed: BIPC.TO, BIP-UN.TO, CSU.TO, BAM-A.TO, BEPC.TO, EQB.TO Want to send us a question? Check out our Anchor.fm link in the description below and leave us a voice message! Getstockmarket.com Candian Investor Pod Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital --- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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It's February 13th, 2021. And it's an exciting, it's like Christmas today because two of my largest holdings and favorite Canadian companies just released earnings. So we're going to talk about that really quickly. And then we are also going to talk about 10 metrics that Simon and I kind of always look at. You know, they don't tell the whole story necessarily, but they're a good screening mechanism and can help you find from a qualitative, sorry, a quantitative perspective

what might be attractive for a great business. So, Simon, what's going on? I know you're a little injured right now, but you're trucking along on the podcast. We appreciate you. Yeah, yeah, definitely. I mean, I'm doing all right. I ended up at the emergency, nothing too serious this week. So I'm back home and ready to record. I was able to work on some things for the podcast this week because nothing else to do, so it should be a fun episode. The commitment level unmatched. All right, so let's get into it.

Constellation Software, can we just have a moment for CEO Mark Leonard? This guy is the man, the wizard, mysterious wizard man with only one photo of him on the internet. He's doing what he always does. They just delivered Q4. Revenue is up 14%. This is on a year-over-year basis. Revenue is up 14%.

Cash from operations up 55%. And free cash flow was up 68% to $989 million. They are one quarter away from a trailing 12 months of a billion in free cash flows. I also want to give an update on Topicus Spinout. That's their Netherlands-based company. It's kind of like Constellation Europe. They did list it and I told you I'd give you an update. Shares are officially trading on the TSX Venture earlier this month. They listed for $65 a share and you got two for every Constellation share. So think of that as a nice fat $130 dividend. It currently trades up a little bit from IPO price at $70.

I've been getting lots of questions about what I'm doing with the shares. I'm doing pretty much nothing. I'm going to continue to add to Constellation and just hold on to Topicus for now. That's a ticker. Topicus is TOI on the TSX Venture. It's Brookfield news. What else?

It's a Canadian investor podcast. We talk about Brookfield a lot. And Brookfield is doing lots of stuff. So do you want to talk about two of the items there on your list, Simon? Yeah, definitely. So there's been some interesting news. So Braden will talk about Brookfield Asset Management after I'm done. But two of the affiliates, if you'd like, I never know what to call them. Subsidiaries.

Subsidiaries. There you go. I was looking for the word. So first one is Brookfield Infrastructure Partners. Some of you might have seen in the news, they made a hostile takeover offer for Interpipeline. IPL is the ticker. They're also listed on the TSX. They already own 19% of the company. They offered a $17 to $18 a share. So they actually had been in talks with IPL to buy them out recently and the talks didn't really go well. Basically, Brookfield has a certain value that they're giving IPL and IPL is thinking that they should be worth more than that. And Brookfield's reasoning is like, OK, yeah, you may have a lot of growth projects, but you're kind of overlooking the current environment when it comes to pipelines and the interest in that industry and the capital that is available. Not to mention, too, it's also a premium to their current stock price, correct?

Yeah, exactly. It's quite a nice premium. So the shares popped 30% on Thursday. So we'll see what kind of happens with that. But that's a classic Brookfield move, I have to say. It's so classic. They tried to really, you know, negotiate something, probably in good faith. Obviously, I was not involved in those discussions in the rooms and everything that happened there.

And it didn't go the way. And they see a certain value attached to that. So they made a hostile offer. They control. They own a big chunk of the company already. So it'll be interesting whether it goes through or not. But yeah, just kind of keep an eye on that if you're Brookfield Infrastructure Partners, because it would be a pretty big deal if they do, they do purchase IPL. Aside from that, I had some people tweeting at me. I'm wondering why Brookfield Renewable Corporation shares were down a bit more this week compared to the BEP limited partnership shares.

So the reason for that, the reason the BPC shares went down is because Brookfield decided to issue, do an offering of 15 million shares at an average price of 51.50 US dollars a share. So that's why that the share price actually came down closer to that. I think right now it's about 50-50 US. I think actually, personally, it's a really good move from them because they're actually seeing that the BEP shares are quite the run up. They're probably more overvalued compared to the limited partnership shares. So when I see a company issuing shares when the stock price is really high, capitalizing on that, I think that's always a great idea because you get more cash without a lot of dilution. So it's really the best case scenario if you ask me when you issue shares. So it's really the best case scenario, if you ask me, when you issue shares. And they'll probably be using that, I'm assuming, for new projects, but also potential acquisitions as they do.

So I'll let you talk about Brookfield Asset Management now. Yeah, sure. Just listening to those things you're talking about, bet against bruce flat i mean the guy is a machine he basically does very contrarian things and it's been nothing but money for brookfield so but against bruce flash is a bad idea uh so the the mothership brookset Management, the one that I own, they just reported Q4. They generated a record $3.1 billion in what they call cash available for distribution or reinvestment. That's typically the terms they use on their statements. It's basically just cash flow metric. This is a quote from Bruce Flatt. We entered the year with our best quarter ever, reflected the continued growth of our asset management franchise

and the resiliency of our underlying business. He then went and gave on some pretty good guidance for 2021 and their ongoing investments. I do want to mention something that kind of flew under the radar is they sold the N-Wave business, which made me sad because i mean they probably got a really good price for it because it has the the environmental sustainable spin on it but n-wave does like deep lake cooling and geothermal and district heating in large cities they have a

ton like if you live in toronto you probably know about n wave and it's kind of sad because that was a really cool innovative business they're basically grabbing really cold water from lake ontario and then pumping district cooling through the buildings in the summer really innovative really cool company and uh they probably got a pretty good price for it so i mean again don't bet against flat i do want to say one hilarious story uh before we get on to these 10 metrics that me and simon are always looking at when we first look at a company but really story. My buddy Cortez, his girlfriend had bought a ton of tilleray stock, $5 a couple months ago. And weed stocks have gone absolutely bananas. It's like October 2018 all over again. And he asked me what I think they should do. And I'm like, well, I mean, they could just like triple from here in the mania. Who knows?

But I mean, history doesn't repeat itself, but it does rhyme. So just be careful. He basically went on to say they sold the shares on Wednesday at $63. $63.91. And the next day, the very next day, shares fell 50% and closed the week out down 54%. I mean, talk about timing. And you can't time the market. Sometimes you can get lucky. But with stuff like this, like you get lucky like that. You make a boatload of money. Don't look at the stock price after, cause it could triple from there. And then you'll like kick yourself, even though it might've been the

right decision, you know, like pop a bottle of champagne, celebrate as a victory and move on, or you can get super lucky like this. But i just thought that was quite a good story and doing the right thing pays off more often than not i mean sure it could have tripled last week like who knows what these things right now but it's just a reminder that out like be careful and make decisions that just make sense and more often than not doing the right thing over a long period of time will yield good results so um i know that's the first time you're hearing this story simon because it just happened but they made so much money like awesome for them that's great yeah great for them and there's a last news story I wanted to talk about. So it made news headlines on Monday.

So it came out in a regulatory filing that Tesla bought 1.5 billion worth of Bitcoin. So that came out the news on Monday. And obviously, when the news came out, Bitcoin jumped about 17%, I think 17, 18%. And it's actually been up more than that for the week. The reason why it's pretty significant is because obviously Tesla has a lot of visibility around the world. It's a huge company. Like whether you think Tesla is overvalued or not doesn't matter. People still listen to Elon a whole lot. listen to Elon a whole lot. And what's also, I think in my view, this kind of gives a lot of credibility to Bitcoin for other corporations, because you may have had CEOs or executives that were looking at it may have been interested, but they didn't want to bring it up because they

might have been afraid to be laughed at or turned down. Well, now it makes it a lot easier to just kind of be like, well, you know, here's an option. Elon did do it with Tesla, so it's kind of hard to be laughing at them when Elon is doing something. So it'll be interesting just in the next couple of months to the next year or two, just to see if there's a really big pickup by corporation

to put a percentage of their treasuries into bitcoin or cryptocurrency and it's important to note too that the companies that have done it so far they're not putting like 20 percent of their treasuries they're usually putting like i've seen so far about like five percent i think is what tesla had done on the cash on it was nine percent i think was it nine nine percent yeah yeah it's and it's not cash that they need to do their operations and that's really important to understand as well because that would have been in my opinion pretty reckless from them to do that so um it'll be interesting how it plays out in the corporate world yeah i i mean i'm gonna we're gonna see

probably other companies do this. I just don't see. I wouldn't be surprised. I mean, that's the bet I would put on is that more companies do this. How many? I don't know. I mean, right when these things happen, you'll get the headlines that every S&P company is going to start doing this. It's like, no, that's not.

No. Like, no. Some, sure. but uh of course everything gets blown out of proportion at the time so just yeah something to keep an eye on exactly it is something to keep an eye on because it is quite significant it does give it some legitimacy whether you like what elon's doing at tesla. So yeah, it's a good point. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you

can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. This is a good base, whether you want to use them for screening purposes. I'm an engineer. I'm a math nerd. I do like this stuff. I do like quant models.

But again, something I want to specify here, and it's a mistake that I made. So learn from mistakes that I made when I started investing, is that I would make almost like pure play investing decision based on numbers. And numbers is the greatest place to start. And I still do that. It's part of my process. But it's just the start. You got to then dig into the business, find out more, dig a little deeper, follow, find out the qualitative measures. If they have a moat, you know, do that kind of due diligence as well, understand the company. But these are like, if I'm starting to research a company, these are a great place to start. So Simone,

you want to kick it off. You have some more obscure ones. You wanted to talk about ones that we don't always talk about, which is probably a good idea. Yeah, yeah, exactly. And like Braden said, I think it's really important just to take them into context. And I've made some of those same mistakes as Braden just said, just kind of looking at certain things like price to book or price to earnings or whatever the metrics are and just base your decision on that. It's really, you have to look at the bigger picture. It'll give you a good idea where the company stands versus itself historically, but also against its peers. And then you put that into context with the whole business and, you know, the future prospects of

the company and so on. So, you know, you can make a spreadsheet, you can be a numbers nerd if you want, that's fine. If you just want to look at these metrics just to give you a general idea, that's I think is a fine approach as well. But just keep them in mind. So the first one is EBITDA to interest expense. So EBITDA is earnings before interest, taxes, depreciation and amortization and you compare that to the interest expense so the higher the number the better it's basically what amount of money how much money do you cover the interest expense with so if it gets really low if it's like I would say probably like under 2 1..52, depending again on the type of business.

But that could, you know, raise some red flags for you because it can be, you know, it can put the company in a precarious position, especially if they're, you know, their revenue goes down, the interest on their debt goes up. So those are all things to consider. But that is something I like to look at, especially if it's a company that relies a bit more on debt, typically companies that will be a bit more asset heavy. That's something you'll want to look at for them. That's a good point. Also, how did you just say EBITDA? A little French Canadian spin on EBITDA. Yeah, I i won't repay you guys can rewind 30 seconds i won't repeat um okay so i'm just gonna start with something really basic and it's it's just really true in terms of my process is i'm looking at revenue growth rates annualized or on a compound

annual growth rate three year five year ten year like on status, you can see at the top, three-year, five-year, and then 10-year, you can see graphed out the revenue growth rate. And it's just a hurdle, right, for me, like in terms of investable opportunities, because at the end of the day, revenue is very telling of the business. Let's not kid ourselves. storytelling of the business. Let's not kid ourselves. And a company's ability to consistently raise that top line means they have pricing power, they are taking more market share. And I just want to see that over a long period of time, and even recently, that it could be accelerating, it could be an opportunity from here. Because at the end of the day, revenue is the entry point for all cash flows into the business, right? And I want to see that increasing over time.

I like to think I have like a 10% revenue growth hurdle rate. If it's right on the fringe, and the company's undervalued, I'll go there. But if I'm paying up for a company i want to see some high high revenue growth rate like 15 hurdle rate so uh that's the first one for me yeah that's good and i like that you mentioned you know over uh three five ten years as well because it's um it can be misleading especially with the past year just looking at like one or two years, because a lot of companies, you know, revenue were hit by the pandemic. Yeah, good point. Yeah. So the net cash position is a metric I like to look at. The reason why I like, well, first of all, net cash, what is it? So it's cash and cash equivalents. I make sure you include short term investments in there versus total debt. So the reason I like to look at that is really gives you a good idea where the

how financially stable the company is, especially when it comes to to cash, because sometimes you might see a lot of debt for the company. But again, a company like Apple has a large amount of debt on their balance sheet. But if you compare it to their cash position, then you realize that their net cash position is actually really significant because they're capitalizing on the low interest rates that they can get by borrowing money. So that's something I really like to look at. You can apply that basically to any type of company, pretty much any sector. Again, obviously compare it with its peers, compare it with itself historically. But it's a metric that I find is not talked about and really useful.

I mean, it is talked about, but not talked about enough. Yeah, in a net cash position is something worth considering. And, you know, here we are. Well, here I am bringing up GameStop again. But this was the thesis, right? It wasn't going bankrupt. They had a net cash position. So people who recognize that did quite well.

So anyways, I'm going to move on to gross profit margin, or what we just call gross margins. It's probably the second thing I look at after revenue growth. And the reason for that is it's really telling of the business. Gross margins are very, very telling of the business model. And all things created equal, higher gross margins is much better. And so what gross margins are is the margin for the actual product. Before you add in all like the SG&A, like costs of like overhead to run the business,

we're not including that. So it's just like product costs, service costs. To be able to deliver your good or service, essentially, is your gross profit margin. So the reason that I like software so much is they have gross margins, you know, north of 80%. Autodesk has a 91% gross margin. So their ability to generate cash through the income statement down to their cash flow statement, they're not taking a big hit on their gross margin there. They're basically flowing it all through. And the reason for that is because it's software. There's not really, really high input costs.

They don't have manufacturing input costs and these kinds of things. So I love looking at the gross margin, seeing what kind of business it is. It's super telling of the unit economics of their good or service. So when I say unit economics, I mean just like to deliver one thing, one good or service. What is the margin inside of that baked in? That's the gross margin. It's a great place to start to understand what the business does and kind of the economics of the business itself. Yeah, that's a great metric that I always look at too.

Yeah, that's a great metric that I always look at too. So my next one is still kind of focused on a bit more debt type of, it's not quite a ratio, not quite a metric either, but I think it's really important to look at, especially if you're going into the deep value state. But any type of company that relies a lot on debt, I think you have to look at this in the financial statement. So what I'm talking about is the debt maturities. So the reason why debt maturities are so important is because, well, first of all, you want to understand where the debt matures, when they'll need to refinance. Is it staggered these are all things you should be looking at the current interest rates but also what the potential renewal rates would be and something to keep in mind as well when

you're looking at potential renewal rates is it investment grade in terms of that company is it not goods that will affect the rate that they're getting so this is something that I think not a lot of people actually look at. And you have a company that could be a great company, but they do have a lot of debt because it's just a capital intensive company. That's really something you need to look at. Because if you don't, if the debt is poorly structured, or if they have poor, they're not investment grade um that could be a big hit to the company it kind of goes back to the the first one i mentioned to the um a bit and to interest expense that metric could go all out of whack if the debt comes to maturity and they're

not able to get a good rate or potentially not be able to refinance depending if they're really in distress or not yeah interesting thing to look at it's important and simon i'm wondering what is the what is the kpi there sorry to put you on your spot but like what am i if i'm looking at this the balance sheet what am i exactly looking at in terms of the number i mean it's hard to say like specifically i mean i would say i would look at it case by case again i would look at it with his peers like similar companies what kind of situations are they in? Obviously, if you see a lot of debt on the balance sheet, that's what I'd be looking at. There's usually a section that they will talk about that how it's structure in the financial statements. So just make sure you look at that. And again,

put it in context, do your research, but that's definitely something I look at. It's pretty easy to identify when you see a company that has a lot of debt it sure is all right moving on free cash compounded annual growth rate longer term so when i talk about revenue growth rate i'm checking the three year the five year even like trailing 12 months but for free cash flow i want to see it on a longer term, like a median compounded annual growth rate. The company's ability to, over time, generate more free cash than they have before. This company's getting stronger and more relevant and more profitable over time. And will continue to do so in the future something i want to be a part of so

the reason why i'm talking about compound annual growth rate and median over the longer term is free cash can kind of bounce all over the map depending on what type of company it is too if they have huge capex expenditures but it's still a great business i sure i like capital light businesses if all things are equal but there's some great businesses that are capital intensive. And there's some great businesses that are cyclical in nature. So that's okay. I mean, all being equal, I would want to avoid that, but it's not all equal.

So that's why I'm looking on a longer term because it can kind of bounce around. But if you look at it from a median, like 10-year compound annual growth rate on their free cash flow, you'll get an idea of what they're able to do. And I think it's a great place to start. And if you think they can continue to sustain that or at least come close to sustaining that, you'll have a pretty good idea of what you'll be able to do on the return side. pretty good idea of what you'll be able to do on the return side yeah i mean i think you guys all know how big of a fan i am of free cash flow in general so i have uh you know can't disagree with that and what is it what is earnings anyways exactly i think free cash flow like brayden said is way more telling um so yeah you can't go wrong with that uh even like you know we've talked in

the past you pay out ratio when it comes to the dividend compared to the free cash flow yeah that's always really important as do-it-yourself investors we want to keep our fees low that's why simone and i have been using questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way.

As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit Questrade.com for details. That is Questrade.com for details that is questrade.com so speaking of dividend so one that's really important as well if you're looking at dividend companies you want to look at the dividend growth rate at least over the three five years i would say going 10 years might be sometimes a bit skewed just because you know the company may not be exactly the same as it was ten years ago so just keep that in mind I think it's great

when management actually states a target and has a history of meeting that target so that's one of the big reasons where I'm a big fan of Brookfield pretty much you know Brookfield asset management BP BIP BPY as well they usually will come out with a growth rate for their dividend and they'll come out with a bracket which is extremely smart I know BEP usually they have about five to nine percent that they want to grow the dividend and it's great when they have that in place. Obviously, you can calculate it yourself, but oftentimes in their conference call or in the annual reports, they'll actually state that target as well. So just make sure if they do state it, that they actually follow it. It can be a bit of a red flag

if management one year or maybe several years, they'll say like, oh yeah, we're planning to increase it, say 10%, and then they just never meet that target, then that actually could be used as a red flag as well. Yeah, good point, especially on the management guidance side. I find companies are quite eager to give dividend growth guidance. Just a little fun fact tidbit here as you were talking. There's a little lesser known Canadian financial company called Equitable Group. And I like looking for things that no one really wants to own. Oh, it's too attached to the housing market, all this kind of stuff.

They have promised 25% dividend growth rate, or promise is probably not the right word, but that's been their guidance. they've been spot on so if you're looking for a financial company with a you know their eq bank which is the branchless bank which is growing revenue like oh my god their their statements are absolutely nuts and it trades quite cheaply like less than 10 times earnings they're growing the dividend at 25 a year and they said they will every year till 2025 and they have done that so far i don't see why they won't be able to meet it so if you want a fast dividend grower ecobank ticker eqb something that no one really looks at it's not really on people's radars it's got all kinds of weird credit risk and complicated statements,

but something to look at. I like touching the unsexy stuff that is growing really fast on paper that is just kind of icky to own because of one reason or another. So maybe one to look at. Okay, so what do I got here? Free cash margin. You can see a theme in the metrics I'm talking about here, Simone. So, yeah.

So, if I were to talk about growth and margins, I think we're getting a pretty good idea of what type of things I look at. So, free cash flow margin. it's another margin metric but it's really telling of how good the business is in terms of like pure profitability when i say profitability i mean actually free cash flow not not net income margin and again i want to look at it at median because free cash flow can bounce around. If there's a big CapEx expenditure, they build a new factory, whatever, that's going to hit their free cash flow but not their earnings. Which is why I look at free cash flow in the first place is because it'll capture some of that capital expenditure, capital intensive businesses. intensive businesses. So the free cash flow margin on a median basis, maybe like five, 10 years on a median, will give you a good idea of every dollar that they make on the top line in revenue in sales, how much of it is going to trickle down to that free cash flow line item at the bottom of a cash flow statement, which is listed on Stratosphere, by the way.

We have free cash flow graph for every company now. And it's a really good way to understand the business. And companies that have really, really high free cash flow margins, like Constellation Software, I was talking about, they're almost touching a 30% free cash flow margin now. That's juicy. And it allows the company to reinvest and reward shareholders. So this is kind of a side tangent. But if you have growing free cash flow

and growing free cash flow margins, combined with my next metric, which is return on invested capital. I'm going to get to that. You can take the floor again. But if you combine all of those three things, now you have this absolute compounding machine. And I'll leave it at that. Yeah, and the ones that Braden mentioned,

obviously I look at all the time as well. I went a bit more for metrics that people may not, I look at all the time as well. I went a bit more for metrics that people may not necessarily be looking at all the time. So that's kind of the approach I took. My last metric, I mean, that's one I don't think we've talked about this one at all before. So I think it's a really, really important metric for a specific type of company and really useless for other type of companies. So this metric is the inventory turnaround ratio. So obviously this applies really well for companies selling goods such as a retailer. So it's quite, it's not very complicated to calculate. So basically you take

the, for example, you could take the cost of goods sold for a year and then you divide it by the average inventory for the year. So you average out each quarter what their average inventory is for the year. So the higher the number, the better since it will show that the company is turning around its inventory quickly. Why is that important? Well, because if they're not turning around their inventory quickly, that can actually result into discounting the merchandise. Because let's take something that's really obvious, but let's take a company like Apple or like Samsung that sells smartphones. Well, if they're not turning around their inventory quickly, new models are coming out. So they have to discount the old ones and then their margins are actually affected by that and then obviously some company they're coming obsolete over time or if you have like big retailers that we're seeing slowly going towards or crawling towards bankruptcy well that's

one of the big issues that they're having is they cannot get rid of their inventory so they have to do some big discounts so if you're looking at a retailer specifically this is a metric that you absolutely should be looking at because if that number is not high compared to its peers it can be really problematic and can actually be a sign of really bad things to come for the company especially if you start seeing that and the trend goes on and the reason why you want to average it out to throughout the year is because a lot of retailers for example a lot of their sales will come in the fourth quarter so it can be a bit skewed if you're not averaging the the average inventory for the whole year

you went real niche on these i love it good work average inventory for the whole year. You went real niche on these. I love it. Good work. Yeah, this one, though, I think it's a really important one. Obviously useless for a certain company, services company. Don't look at that. But I think it's really important.

No, it is. And these are good things to look at, especially if it's a retailer, you've got to be looking at inventory metrics. But yeah, good point. All right, let's wrap this up. I got one more, and I kind of hinted at it before, which is some profitability metrics like return on equity, return on invested capital. I've been studying lots of kind of historical big winners.

What do they have? What does management have? Books like The Outsiders. What have certain management teams been able to do? And how are they incentivized correctly. Return on equity and return on invested capital are always shining stars in terms of these big winners. They have sustained over 20% return on equity. It's a pretty good hurdle rate for exceptional companies. And the reason for that, as I mentioned before, is companies that are generating cash, they have three main options when you generate free cash. Is pay a dividend, buy back stock. So one, pay a dividend, two, buy back stock, or three, reinvest in the business.

And then I guess a fourth one is do M&A, like mergers and acquisitions, buy other companies. So those are the four paths you can take as a manager. And when you are a manager of a company trying to determine how can I maximize return on my invested capital, maximize return on my invested capital. For shareholders, the ones that have really been exceptional compounders over time is they have those high sustained ROIC numbers. And it just makes sense, right? If you pay a fair price, overall, you should long term be able to get similar results in terms of your returns sustained as their return on invested capital, or their return on equity, which is net income divided by shareholder equity. So it's important to think about these things. Companies that have sustained over 20%

return on equity for a long, long time, maybe even higher. If you look at their stock chart, they've probably done pretty well. This is not a fluke. These things kind of all make sense. And it's a good number to look at, and it's very telling of their management's ability to not only make decisions, but if their business is really good, they can reinvest it at higher rates than other companies.

So I love looking at those metrics and they can be very very telling of big big winners so the reason i say roe and roic is because for instance roe is the most important metric for bank for a bank investment i can't think of a more important number than if you're comparing Royal Bank to TD over time. Just take the one with the higher ROE, probably. Yeah, probably definitely a good idea. And one last thing that companies actually can do with free cash flow is pay down debt,

which is another really good thing, obviously, in certain situations, which can really help future profitability. Did I miss that one? I missed that one. Yeah, I think they don't do it as often, but yeah, exactly. It's probably the fifth down the list, so I'll give you a pass on that one. Oh, thanks, man.

Appreciate it. Really appreciate that. I noticed a theme here. I was talking like growth and margins. you're talking about the balance sheet and then when i miss something you're like oh they can also pay down debt hey i like my businesses but not too much well capitalized uh c1 you kill me okay that does it for this week guys i love these kinds of episodes because they're easy for us to do, and I feel like people learn a lot from learning about these kinds of metrics. All of them you can find, except for maybe some of the niche ones

Simone was talking about, you can all find them on Stratosphere. You go to Company Search, every single listing in North America. You type in the ticker, Canadian, US stocks, doesn't matter. You see all this stuff. You see their financial statements on a 10-year basis. When you go to an earnings report and you see the year-over-year, like three months ended or year-over-year results, that might be fine. But a lot of these metrics I'm talking about, I want to see it on a 10-year basis. So that's why I built Stratosphere,

is to see 10-year financial statements, all the metrics graphed out. And you can get a much better picture of the business than just three months ended or one year. Even on some of these other sites, they give you three years of data. Sure, that might be okay, but I need to know more. So that's why I built Stratosphere. If you go to getstockmarket. Sure, that might be okay, but I need to know more. So that's why I built Stratosphere.

If you go to getstockmarket.com, you can go on there, sign up. You don't even need a credit card and you can see all the metrics you could possibly want. We will see you guys next week. Take care. Bye-bye. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.