The Canadian Investor - 20 Important Metrics When Analyzing a Stock

Episode Date: January 29, 2024

In this episode of the Canadian Investor Podcast, Simon and Braden look at 20 important metrics used to analyze public companies. Join us as we break down concepts like earnings per share and debt-to-equity ratios, making them easy to understand and apply in your investment decisions. Whether you're a newbie or a seasoned investor, this episode serves as a practical guide to help you confidently navigate the world of stock analysis. Tune in to gain valuable insights and take your first steps towards smart investing! Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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The market doesn't care. It's forward looking. And this is why you stay invested at all times. Yeah. I mean, I stay... I'm mostly invested, right? But I would say I'm 90% invested right now. And yeah, I continue buying dollar cost average, mostly through index funds. But I started a couple new positions, I talked about it, well, one new position, Termaline. And, you know, you can go back to last episode for more details on that. But yeah, I mean, it just shows to stay invested and not panic. I mean, you can always, you know, position your portfolio in a way that you But yeah, I mean, it just shows to stay invested and not panic. I mean, you can always position your portfolio in a way that you'll benefit depending on what happens. That's right. This is an episode that I think will be well received from many. And it is us going through metrics and numbers that we use when we're researching a company. And we're going to kind of go back and forth on some of them. I'm going to structure mine like top to bottom on

the platform. When I'm on the FinTRA platform, because I do use it for my research, like what I kind of look for, what I go through top to bottom, which metrics I always look at, and some examples and some nuance kind of in the conversation and explaining what those metrics are. Now, I know many folks listening to the show who have been, you know, a long-time listener, first-time callers will know these metrics well, but it doesn't hurt to get solidifying on them by listening to the pod. And if you're new to the show, we get lots of new listeners on the pod this time of year. It's good to get kind of a foundation of the numbers we talk about so that

this doesn't sound like rocket science because it really isn't. There's a lot of time in financial media and news, multiple words that get used for the same concept and metric that you probably learned in grade seven math, right? So it doesn't have to be overwhelming. Anything else you want to add to this conceptually? No, I think that's a great overview. And I mean, we'll go over it. Obviously, for some people are a bit more seasoned. A lot of this they'll be familiar with. But I think it's a good refresher. I mean, even as we were, at least as I was doing my notes, just a good refresher to go over these metrics.

And some of them I use a lot more than others just because they apply to most companies. And some are slightly more specific to certain type of companies. But I think that's where it'll be very useful for people is they may hear certain types of metrics. And just to take that into context and understand that depending on the metrics, some may apply to a certain type of company and some may not. That's right. And it's not like a fully exhaustive list and there's nuance to this biz, but it's kind of like a 90-10 principle here. It's like 10% of the metrics that have like 90% of the effectiveness and like 90% of what we're actually looking at every time. Like metrics that no matter what the company, maybe with the exception of banks, because they

don't have like gross margin and EBITDA and those kinds of things. with the exception of banks, because they don't have gross margin and EBITDA and those kinds of things. With the exception of that, we're looking at these for every single company. All right. Do you want to kick us off first here? Yeah. And just before, last thing I'll add here is a couple of points. So valuing a company is definitely more art than science. And it's important to look at several metrics when doing a dive into a company and not just one like price to earnings because that's the most common one, I think,

that we hear at least on mainstream financial media. And I always look to compare a company to its peers to get a better sense of the metrics and also look back at itself on a historical basis that provides some more perspective. And again, the metrics are just part of the investment, understanding the company, how it works, its sector, its history, management, and all these different things that you can't necessarily get from a metric is as equally important, if not more.

That's right. And like so many of these we talk about, you'll hear like synonyms of them. So we'll do our best to try to talk about like the synonyms of like, you know, people say eight times earnings, eight XPE, forward versus trailing, you know, an eight X multiple. All of those can be, you know, generally speaking, the same exact thing in conversation. And so we'll do our best to specify that. Yeah. So my first one here is market cap and EV or enterprise valuation. So they definitely go hand in hand. Market cap is useful because it gives you the total market value of the company. You simply take the number of shares outstanding and multiply them by the price of a share. And for enterprise value, use the market cap and then subtract any cash on its balance sheet and add in debt that they

would have. So just looking at EV and comparing to the market cap, you can essentially know whether the company is in a net cash position or net debt position just looking at these two. So that's something I like to look at because as a glance, it'll give me just a quick overview of what kind of the asset mix is of the company and the actual value of the company. Yeah, good call. the actual value of the company. Yeah, good call. I mean, market cap's probably one of the things we always use to describe a company to get a quick gauge of its size. I'm going to use two company examples because they're so contrasting during my segments today, which is Microsoft versus BRP, ticker DOO on the TSX, the Bombardier Rec Products versus Microsoft. or DOO on the TSX, the Bombardier Rec Products versus Microsoft. We're talking about a 3 trillion, so 3,000 billion market cap versus 7 billion in market cap. Just to give you the range here,

and I've chose these ones as well because one's fully richly valued and one trades at much deep lower multiples. So I think that that's a good comparison. Enterprise value for those people to just think about it, if you're new to the metric, is the reason people use it so much. Simone, if I was to buy your business and I was to take on all the debt, then I would take on all that net debt. What is that total amount? So say you have, you know, the business is 2.7 million, but you have 300K of debt. I'm taking on basically a transaction that involves, you know, 3 million here in this quick maths example. Yeah, no, exactly. So, and now the next one here, I referenced it earlier, price to earnings.

So you compare the market cap of the company versus its total earnings. You can also do it on the share price basis versus earnings per share basis. It's going to add up to the same thing. If you're new, when we say earnings, it means the same thing as net profit, net income. These are all synonyms. Probably the most common metric you'll see when it comes to valuation. Like I said, it's constantly cited by, you know, financial media. It does have a lot of limitation. That's because earnings can be, you know, lack of better words,

kind of manipulated with accounting. There's also some non-cash items that show up. So, you know, it can vary substantially from a year to year basis. You also have to be careful when looking at price to earnings or earnings in general, because most of the time it's based on the trailing 12 months. So the company might look like it's cheap on a price to earnings ratio because it had really high profits in the last 12 months. But in reality, things are slowing down and the forward looking P is actually much higher since the profits are going down. So you have to keep that in mind. And I think that's a common more beginner mistake. And if you want to sound smart to someone that

doesn't know too much about investing, but has heard the price earnings ratio, talk about earnings yield. Earnings yield is just the same thing. You just inverse it and it's a percentage instead of being kind of a solid number, a non-decimal number. Yeah. Good call out there. When people say free cash flow yield or earnings yield, it's just those price to earnings or price to free cashflow, respectively, one divided by that number. Yeah. You just fled the denominator and the numerator. That's it. Yeah. But you can sound a lot smarter on TV if I'm talking about a free cashflow yield. I like that. What I'll add here is when it comes to valuation metrics, it's not hard nowadays to just get a check out what forward multiples look like based on next year's estimates for well-covered companies from analysts.

They are estimates, don't get me wrong, but it gives you that second check, as Simone was mentioning. Say we're talking about a cyclical that looks super cheap on last year's trailing earnings and analysts are pricing in a really bad year next year. You might see why it's cheap, right? So it's not the be all end all of like, oh, it's going to be trading at 23 times next year's enterprise value to EBITDA, but it gives you kind of that second gut check. And that's when forward estimates and forward multiples are super useful. So I'm always looking at those. The one metric I like doing broad based comps on is enterprise value divided by EBIT. So it's earning for interest in taxes. Very similar to operating earnings. So enterprise value by operating earnings. It's really nice for screening across a lot of companies and getting some sort of normalized version of what these companies might look like.

Yeah, no, well put. So that's a great one as well. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty,

it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Now to go back kind of on the same team price to free cash flow, very similar to price earnings. This one simply compares the price of company versus its free cash flow. Free cash flow is the cash from operating activities that you'll find on the cash flow statement minus the capital

expenditures, or you may hear people say cap X. This can be found, like I said, on the cash flow statement. I find this useful because it does remove non-cash items from the calculation and shows what you are paying for the actual cash that the company is generating. Yeah, nothing to add there for me. I would say when it comes to free cash flow in general and like what you're gonna talk about next, free cashflow per share, is just remember it's not as smooth. You have a huge CapEx hit. Like you get a company like Amazon that's hiding tens of billions of dollars

in free cashflow with huge CapEx spends over the last few years. And so it can be a little confusing for beginners. So it's just best to kind of understand how capital spenders work into that calculation if you're going to be using free cash flow. But it is like finance nirvana, especially when you're talking about intrinsic value growth of the company is like free cash flow per share. Yeah. And I think to add to that as something with free cash flow too, it can be really lumpy on a quarter to quarter basis, best use on their longer timeframe, I would say at least on a year,

yearly basis, or even a longer timeframe. I mean, that same would kind of go with earnings sometimes depending on the business, right? If you have a retailer that does most of its sales in the last quarter of the year because it's the holiday season coming up, clearly the free cash flow numbers or the earnings won't look that great the first three quarters of the year, and then they're going to look amazing the last quarter. So you have to make sure you also understand the business when looking at these numbers. And know what the metric should be specifying, depending on the platform you're using. Like on FinShot, it'll say next 12 months NTM or trailing 12 months, which will include those four last quarters for a company like you're talking about a retailer there to kind of smooth

it out. Yeah, exactly. And to stay, I guess, on the free cash flow theme here, I love looking at free cash flow per share. You essentially looking at free cash flow per share. You essentially take the free cash flow generated and divide it by the total number of shares. This is most useful because it takes into account share dilution. You'll find that companies that increase this over time will usually provide very good returns to shareholder. I really like this metric. It's one that I always look at for all the companies I invest in. Especially on a long time horizon, just seeing the free cash flow per share evolution. I mean, people say, you know, stocks follow earnings. I think that that's right. An even

better version of that is stocks follow free cash flow per share over a long enough time horizon. Like that's ultimate gravity there. Looking at growth here, what are you looking at there? Yeah, go for it. I know you had highlighted some things. Some revenue growth obviously is really important. Probably one of the first things you should be looking at in terms of when you're looking to invest in business. You want to elaborate on that a bit?

It's the first thing I look at. With every company, once I figure out what do they do? What is the one-liner for what this company does if I'm completely new to the name? Second was like, is this company growing the top line? Because that's just a filter for me. I'm not looking to dumpster dive into things that aren't growing. I'm looking to be a quality growth investor generally, if I was to summarize that. And so I'm looking at how has the growth been lately on a one year, three year, five year, 10 year and beyond growth over time, typically on a compound annual growth rate. And then I want to

actually see that graphed out, which is super easy to do on the platform. You just click revenues and you'll see over time, you'll see if the revenues are cyclical, like you toggle the quarterly. And like you're saying, you just see that huge December spike, or if it's a travel company, that huge summer spike. So just that can tell you a lot about the business in one chart. You know, is this a growing company? Is it a shrinking company? And that's going to actually help me figure out, that's going to be more instructive about the company from a valuation perspective too, with that context in mind. The reason you and I were so bearish on BlackBerry was it wasn't cheap at all. If you consider that the company was shrinking, maybe it's a cheap multiple,

but a cheap multiple for a growing business is maybe more expensive than a rich multiple for a growing company, especially if your time horizon is beyond three, five years. growing company, especially if your time horizon is beyond three, five years. And so just to give you some idea with Microsoft here, they have a five-year competitive growth rate on the top line of 13.7%. That's kind of in the sweet spot for a lot of these high-quality compounders, these big companies that just seem to just kind of grow double digits just from pricing power every single year over year. So in that kind of like low teens number, 13.7 for Microsoft, that number for BRP is 16.72%. Again, a lot more cyclical of a company. And that's why, for instance, the PE forward on Microsoft is 38.4 today. PE forward on BRP is 10.2. So, you know, a world of a difference. Both are growing companies, which I think is the important part, but how the market

views them and how it views that, the revenue chart, it's fair, right? Like one goes up every quarter, no matter what. And the other one doesn't. Investors like the one that always goes up no matter what. Yeah, exactly. And for people that are, again, a bit newer here, when we say top line, that's a synonym for revenue or sales. Look, I'm already drinking the Kool-Aid. Yeah, exactly. Thank you for calling that out. Yeah. Another one for net profits or net income or earnings would be the bottom line. So it's just the way the financial statements kind of go. That's a term you'll see pretty often. So just something I wanted to specify. Now, the next one I'll look at is profit margin. So there's a

few different ones you can look at here, but I'll kind of focus on two. Gross profit margin is the first one. This simply compares the sales to the cost of goods sold, so COGS and nothing else. So the cost of goods sold is a cost related to making the product or producing the service and nothing else. The operating profit margins compares the sales to the operating profit. The operating profit, like Braden said, is a synonym to EBITs or earnings before interest and taxes. And it just includes more expenses related to the company than COGS or cost of goods sold. So I like to look at both because what we've seen, especially after 2021, is you had these great companies that were generating fantastic gross margins.

And those gross profit margins were great, but then we saw as inflation picked up is, okay, maybe they were able to get these margins, but then the operating profits were really taking a hit and those margins were taking a big hit. So that's why I think it's important to look at both and not focus too much on just one or the other, just taking both into consideration. Yeah, that's right. And this is a perfect example of two companies for me to compare. So you can see a stark contrast in the margin profile when it comes to profitability of a tech company with global distribution versus a manufacturing company with high COGS and high operating profits. So when I say COGS, cost of goods sold.

So gross margins, I'm always looking at that's close to 70% on Microsoft compared to 25% on BRP. Microsoft has a operating margin of 43.5% compared to 13.5% for BRP. So you can see stark contrast. If you're talking about operating profit, we're basically talking about a 3.5, four X increase to Microsoft. There's a, sorry, Microsoft has on BRP. There's a reason that people like these very scalable tech companies that have basically no increased costs as they gain customers. And that's why people like software as a service so much. It's why people like Visa and MasterCard so much. Once that network's set up, you can realistically achieve 60% free cash flow margins, which is not a number that you just hear on planet Earth very often. So these are one-in-a-kind

metrics. Yeah, no, exactly. And now the next one here, moving on to price to book. So this is one you'll hear pretty often. So this is based on the book value, which is what you get if you sold all the assets of a company paid off the debt, the remaining amount would be the book value. Now the price of book compares the market cap of the company versus the book value. And it is a useful metric for asset heavy businesses and financial companies. So that's why if you ever look at, you know, Berkshire Hathaway and with Warren Buffett, when he's looking at buybacks, he'll often mention the price to book ratio. I think it's like, what, 1.3, 1.35 is kind of his, you know, his price point to start making buybacks if it dips below that. But I think price to book is really important that it is useful only for a certain type of

businesses. If you look at a tech company, it's not very valuable in my opinion in terms of giving you some perspective. And this is why it was one of the holy grails of valuation metrics, you know, in the times of Ben Graham writing, you know, the intelligent investor, you know, buy stocks at, you know, less than one times book and less than 15 PE. You wouldn't be buying many stocks these days with those metrics. And the reason for that is you just explained it. These were balance sheet heavy companies where this metric was important. It's so skewed with the S&P 500 today. When you have Facebook and Nvidia being massive, Google, these asset light companies with gigantic market caps, it's just going to skew the entire index in terms of price to book. So I pretty much only look at that metric when I'm

looking at Berkshire banks. That's basically the only time that I look at it. Yeah, exactly. I think, yeah, it's just Berkshire banks, utilities, stuff like that. Anything that has a lot of assets, it'll be a useful metric. Not, like you said, as useful as it used to be and on a broad basis, but definitely something to be aware of and something to keep in mind if you're interested in those kind of businesses. Now, the next one here, I know a lot of people like dividends, so dividend yields and buyback yields. I'll do them all at once because they're just essentially returning money to shareholder. Now the dividend yield is the yearly dividend paid per share divided by the share price. Keep that in mind because sometimes you'll see a company that will

pay dividends four times a year. So you just have to make sure that you have a look at that dividend multiplied by four if it's only the quarterly dividend you're looking at. The buyback yield is the amount of money spent on buybacks versus the market cap of the company at the beginning of the period, typically done on a year basis. And if you see a negative buyback yield, it just means that the share count has increased. That's why I like this metric because you can actually have a look and get a quick idea of what's going on share count wise. So a buyback yield is something definitely interesting. And I think they should be looked at in a similar fashion because they do. It does look

at the amount of money they're returning to shareholders. Yep. We added shareholder yield, buyback yield, some other payout ratio type metrics. I'd have to look at all the yields we added recently on FinChat. Of course, the dividend yield, earnings yield, debt pay down. Yeah, all this stuff is now in the platform. It's super helpful, especially shareholder yield. You add all of those things up together and you get some representation of what shareholders have been paid through capital allocation, whether it be share buybacks or paying out that div. One thing I really want to mention is if check at the actual dividend history, when looking at the dividend yield, if the calculation is including a special div, that can lead you astray. Say you just got that Costco div, that special dividend,

and you're looking at the yield and it's a lot higher on a trillion 12 months. that special dividend, and you're looking at the yield and it's a lot higher on a trillion 12 months. And then they might not pay that for three, four years, that special div. So just check at the actual history and see what's being calculated in there. This is an outside case. Most companies don't pay special dividends, but just a caveat to look at that. Yeah, exactly. So not much more to add there. caveat to look at that. Yeah, exactly. So not much more to add there. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be

sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Now the next one here I have is the dividend payout ratio. So obviously this only applies to dividend, but this compares the amount of dividend that has been paid out versus net incomes, or you can use a free cash flow as well or both. So I like to look at what the payout ratio is on an earnings basis, but also on a free

cash flow basis. This is one metric that you should always, and I don't know if I can say that, and let's just say in caps, always, always, always look at when investing in a dividend company, especially if you're banking on the dividend income. But even if you're not, you should always have a look at the dividend payout ratio because this will tell you whether the company will be able to continue paying the dividend for it if there's any kind of margin of safety. Because if you have a company paying out 90-95% of its free cash flow, I mean, there's a good chance that they're not going to be able to sustain that for a long period of time. that they're not going to be able to sustain

that for a long period of time. Maybe they'll use debt to be able to do it. But as a more longer term investment, that could be a big red flag if you're banking on the dividend for part of your returns. Yeah, good call. There's so many companies that fall into this. There's a reason they're called dividend traps because they literally trap investors with a high yield. One thing I do want to mention here is, yeah, you can look at it on a free cashflow basis. And if you're looking at a REIT, I suggest using payout ratio with adjusted funds from operations instead of earnings for many accounting reasons that I don't need to explain right here on the podcast right now. But if you're looking at a real estate investment trust, adjusted funds from operations is, in my opinion, the most useful

metric just broadly. You'll see that metric a lot on like brookfield companies as well because they're so capex intensive and you know they do have that rent component in there so just uh just a little thing to look out there for for you yeah yeah definitely and i mean i think reeds are and those kind of companies are a bit of different so that we could probably do an episode eventually on just just those and what how they're different and why there are these different metrics that we could probably do an episode eventually on just those and how they're different and why there are these different metrics that are to be used here. And in terms of the ones I'm looking at, and there's other ones too, I wanted to add one that was a bit more towards the debt. So EBITDA to interest coverage ratio. So this compares the earnings before interest, taxation,

depreciation, and amortization, so EBITDA, to the interest payment. So that's extremely important if you're looking at a company with debt. I like to use this and compare it to their peers, but also I like to see how it's evolved, because especially right now in a rising rate environment, if you see that the interest coverage ratio has really increased over the last little while, there's really two things that could have happened. First, the amount of debt hasn't really changed, but they have a lot of revolving debt or variable debt. They're all synonyms. So that's something to be aware of because if interest rates keep rising, then those costs will increase. Or the other one

is they have fixed debt, but they've increased the amount of debt that they have. Therefore, they've also increased the amount of interest payment. And comparing to EBITDA makes it a good comparator because you have an idea how much it is covered. So the higher the number, obviously, the better because you want it to be as like, you know, again, you want a margin of safety in place. If you're looking at a, you know, a coverage ratio that's close to one, there's definitely some alarm bells that should start going off in your head because there's really not much flexibility there for the company. Most of their money, most of their profits they're

generating, I know it's not net income, but most of the profits are actually going to servicing that debt. Yeah. And I'll add there on the balance sheet, I also want beyond just ratio, I basically don't care about nominal amounts whatsoever, like amount of revenue, because that's relative to how big the company is. Two things that I really care about, just nominal amounts on the balance sheet, it's just pure cash. Regardless of how big the company is, just how much actual cash do they have sitting on the balance sheet? And you'll see that in as cash equivalents. And in nominal again, debt coming due and interest payments that they have. These are basically the only time I'm looking at just nominal, not ratio amounts where I really want to understand what it is and wrap my head around it. And that can give them some margin of safety and give you

an idea of the balance sheet. And especially if they're dividend payers or what the capital allocation might look like in the future. So I definitely want to look at that. You'll see these absurdly giant cash piles for big tech and Berkshire in there as well. One thing that I just wanted to kind of circle back on, I have two more metrics here, but I also wanted to give some framework on revenue growth just to circle back a little bit, because I think it's so important of like, where do I screen? Do I buy companies only growing 20% over year over year? How growthy are you going to get? And the reason I screen personally at 8% revenue growth is back of the envelope math, which I think gets you to a really good place,

is you go like real return X inflation, plus a little bit of pricing power baked in. plus a little bit of pricing power baked in, anything beyond that, you can find real organic growth. So you have a little modest amount of pricing power built in over time. They're passing on inflationary costs. Okay, that basically gets you to eight back of the envelope, depending on where inflation is at. Anything beyond that, you can generally find organic growth or acquisitive growth. So the company's actually growing that top line without these external factors and just passing on modest pricing power over time, which are fine. And it's good that they pass those on to those customers. But that's why I screen typically at eight and above. In terms of returns, we didn't talk much about return on equity or return on invested capital. Return on invested capital is looked at as like

the holy grail metric for investors. Charlie Munger has always said, you can't really achieve a return greater than the return on invested capital over time. And so you'll find companies that can sustain to what is terrific is like sustained median over 20% return on invested capital. Those are fantastic companies. I'm just looking here, five-year average, Microsoft's at 28%, BRP's at 20.7%. Just phenomenal. There's a couple of different ways to calculate return on invested capital. I just use the most standard NOPAT calculation, which you can look up because you can get pretty into the weeds on this calculation. But to give you an idea of what this is, is how good the company is. If we're to just really think of an analogy of return

on invested capital, is someone, I give you a dollar into your business machine and you print out a dollar 20. It shows that the company is efficient at taking capital and creating value with it, just on a broad understanding of the metric. And if you think about that conceptually, that's why it's so important. And that's why people care about it so much. So you'll see that return on invested capital or ROIC commonly referenced for companies. Anything to add there? Yeah, just because I know, Pat, people may be wondering what that is. So that's net operating profit after tax. So just wanted to clarify that. But yeah, ROIC is definitely one of the top metrics to look at if you want to see how

efficient or how good they are at investing capital. And it's really important. Typically, the one I will look at as well. The reason I didn't add it on my list because I saw you added on yours. Okay, there you go. I'll leave him a few and then chime in afterwards. Well, perfect. Because now I have, I'm going to talk about three or four more kind of nuanced stuff, industry stuff and company specific stuff in terms of examples. So just quickly on the balance sheet, net debt to EBITDA, you mentioned a similar metric there,

long-term debt to equity, and then EBIT to interest expense. Again, very similar. I think you had EBITDA. I generally, broad scanning the market, EBIT is the number that I really like to use. That's earnings before interest and taxes. Industry stuff. So what I will do is I'll make a little comp sheet. So you pick on the company. I used MasterCard for this example. And I just wanted to compare, you know, what MasterCard's metrics look like compared to Visa, Discover, and American Express

to get kind of a lay of the land, you go on MasterCard, on FinChat, you press industry, you can adjust the companies and you can adjust the metrics. So what I just did here is I selected market cap, revenue on a five year trailing compound annual growth rate, price to earnings, forward price to earnings and net margin. The reason I use net margin is because I want to see it all fall through. And these companies are different. For instance, American Express, since it is a bank and operates differently, it doesn't have a gross margin. This is where these kinds of like, this is where these episodes, you actually get like these little nuggets of of useful information.

Because when I was starting out, I would have thought to myself, the system's broken. It's not showing gross margin for Amex. Amex operates as a bank and they don't calculate gross margins. And so that's why you'll see that. So I'm throwing a net margin. When you compare them, you get a net margin for MasterCard of 45%, 53% for Visa, 22.5% for Discover, and 15% for Amex. So you can see a massive range there and I can sort them. If I look at how they've grown, those companies have grown from around 8.5% to 11% and very, very similar. MasterCard has the edge on Visa on growth a little bit. And you can see that come out in the forward multiple. Visa trades at a 27 times next year's price to earnings and MasterCard trades at 32. So the market thinks that MasterCard's growth internationally will continue to outpace Visa's,

but just slightly. Like it's not like the multiples double, it's just a little bit higher. And so they mostly trade on very similar numbers. KPIs. Now this is where I think real research is done on a company by company basis. I'm going to use Netflix as an example. Okay. If you know the company, well, think of a company like you might've worked at, or maybe even a company you run. There's a good chance you don't think of your business or value

it, or, you know, your main milestones or targets is around earnings per share. I'm going to strongly, confidently say that if you run like an auto shop, you don't report back to your wife on your earnings per share or your husband on earnings per share. You probably talk about profitability or even like cars serviced, okay? Like how many people were getting through the door? Netflix in Q2 of 2022. Simal, you remember that day when they dropped their Q2 report, 2022? Was it when their users are, yeah, it would have been Russia. Yes.

Following the Russia invasion, their users dropped, right? Yeah. That's right. And so I graphed the the kind of total here you want you can drive the screen here for joint tci subscribers they went from 222 million global subscribers to 221 not a huge deal but it was the first time this company reported a net loss of subscribers, which sent the stock down, I think 36%. If I remember correctly, it was in the high, mid to high 30% drop in the stock price on release of their earnings. And revenue was up. All the traditional financial metrics were up,

like all the like kind of traditional financial metrics were up, but it was the first time that Netflix subscribers had had a little bit of adversity. And there was the Russia thing that occurred. So they lost a bunch of subscribers. They weren't serving Russia anymore. So that got factored in, but panic on the streets, Netflix lost subscribers for the first time is the growth dead, right? And so then boom, the company's valuation gets slashed. And so this is an example where nothing else really matters other than this graph. If you're on jointdci.com right now, watching us on the Patreon, this is a one chart business. This is the only chart that matters for this company, from my view. And it's the only chart that management really cares about, which is driving subscriber growth over time.

So that's an example of a KPI. Let's compare that on an industry comp, Simon. I have here average ticket. If you scroll down, average ticket for Lowe's versus Home Depot. So you can see that average ticket for Lowe's is typically around like eight bucks more on checkout. In 2012, it was 55 bucks for Home Depot and it was 63 bucks for Lowe's. So that just means like the average customer, what they're ringing up at the teller, that has grown over time tremendously for these companies. It's 103.6 in the end 2022 year ending and 90.4 for Home Depot. So they've even extended that gap a little bit, but both numbers have grown at around 5.1% year over year over that timeframe. So there's an example of like, I think Home Depot

is a better business, but like, I don't really have any stats on that. Like, I don't know. Like, I have to dig into the numbers. This is a perfect example of like, I want to compare the KPIs and I want to see it visually. Like it's one thing to have it in a table, but I want to actually see that evolution over time. Yeah. And I mean, obviously on here, Lowe's is doing better than Home Depot, but it's growing pretty much at the same pace. And I, you know, obviously I know Home Depot and I'm pretty familiar with Lowe's. I'm not going to go much on a limb to say that Home Depot makes up for it by traffic and volume compared to Lowe's. And so it's just an example here.

But no, I think that's great when you look at, especially in this case, it's essentially, I mean, it's essentially a duopoly. And then you have a lot of little fragmentation with smaller players. Right. And I can also compare like selling square feet, you know, like total number of stores, you know, and get kind of a understanding of where they differ can sleep well at night, and I want to pick one, I would want to kind of understand the nuances of those businesses. And so I don't own either of them. So I have no real hot take here. None of this is advice, of course, but I'd want to understand these things over time. And that's why I talk about KPIs both on a company level

and on an industry comparative level. No, I think that's a great point. Yeah. Well, folks, thanks for listening. That is a good roundup of stuff that we're just kind of always looking at quick glance. And yes, there's a lot to digest. There's a lot here, but it's one of those things where you get really quick.

Like I could probably do all of those things on a sophisticated platform like FinChat in maybe five to ten minutes. That's not deep research or anything, but I'm at least understanding those metrics, how big the company is, how profitable it is. Is it growing? Are the return numbers nice like on a ROE or ROIC? What do the competitors look like? Are they growing faster or slower? What are the KPIs? I can realistically get,

I can go from like zero to one in like 10 minutes. And then like one to 10 is like buying the position. That's gonna take me, sheesh, sometimes years if you know me. But I can get from zero to one pretty quick. Yeah, and I think it's a good starting point. And it's just a starting point, right? Looking at these metrics,

I think it can easily weed out some bad investment without too much effort. And then if you do like what you're seeing at a first glance, then you can start digging into more into the annual statements, start listening to some conference call, hear what management are saying. You can look at Glassdoor to have a sense if employees are actually liking the business. You know, they like working there because that's usually a sign that they're treated well, which they'll usually perform better. You can start looking, we talked about debt, like how the debt is structured. There's all these different things to, you know, to keep looking at once you've gone that initial stage.

This is just a starting point. But I think that starting point can save you a lot of time versus just digging through the financial statement and then realizing like five hours in, like, oh, okay, I don't really like what I'm seeing. So I just wasted five hours. Instead, you look at these metrics and you can save yourself a lot of time when you're just on the initial stages. You know how many like click revenue, see the revenue evolution over the last 10 years and back scroll, I do on a new name because I just don't buy shrinking value ideas. No matter how compelling they are, even if it's trading less than a cash position, like it's never enticing enough for the way that I invest. So for the way that you want to invest and, and, and as you get familiar, and a lot of people listening to

this podcast are very familiar and they're listening to this and they know a lot of this stuff. This is how you can now build screens as well. Some, some complex screens on like, okay, I'm looking for companies that meet criteria X, Y, and Z. You can literally do that with AI now. I want companies that are trading X, Y, and Z. Say you're looking for opportunities like in Canada, like mid caps in Canada. I think there's so many, there's perennially great ideas

between like 500 mil and a billion in market cap on the TSX of profitable growth companies with global exposure. Maybe that's a really good hunting ground. You like screen Canada, screen growth, screen profits, screen dilution, screen. Trying to think of some other stuff like balance sheet. balance sheet like you get you could put up a screen for figuring out a universe of ideas to dig through in again five ten minutes i would i would suspect yeah no i well put it if you have not checked out the patreon that is at join tci.com and for those who are maybe getting into the real estate game. Maybe you have bought your first house. Maybe you're looking at buying your first house. Maybe you are a landlord, or maybe you are thinking of

becoming a landlord. The Canadian Real Estate Investor Podcast, which you can find on your podcast player there, is like our sister show. They talk strictly about real estate. Dan and Nick know what they're talking about. These guys are like celebrities on TV all of a sudden now all the time. They're getting the call from all the big networks. And when you're as handsome as they are, it makes a lot of sense. That is the Canadian Real Estate Investor Podcast. You can go check that out. For now, we will see you in a few days. We are here Mondays and Thursdays all year long. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice.

Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.