In the filter created this week for The Globe and Mail, we screened for Canadian wealth creators with steady cash flows
So far this year, the Canadian market has been doing fairly well and recovering from the sharp December pullback. The recent rebound makes it as good a time as any to look for Canadian stocks that have a sustainable performance and are trading in an attractive price range. We screened the Canadian universe by focusing on the following criteria:
- Market capitalization of more than $1-billion;
- Positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a greater pace than the cost of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
- Economic performance index (EPI) of more than one and a positive EPI 12-month change. This is a key criterion as it calculates the return on capital to cost of capital. An EPI of more than one indicates that the company is generating wealth for the shareholders – for every dollar invested into the company, more than one dollar is generated in returns;
- Free-cash-flow-to-capital ratio greater than 5 per cent. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio and more than 5 per cent is excellent.
- Future-growth-value-to-market-value (FGV/MV) between 40 per cent and minus 70 per cent. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk.
Read more in this article written by Noor Hussain, Analyst & Account Executive at Inovestor Inc.
