7 metrics to evaluate a company using a custom spreadsheet
After spending 3 years reading about companies and how to interpret their balance sheets and financial reports, I finally managed to isolate the most important ratios and metrics, in order to evaluate their longevity and their growth potential. I will also present screenshots from my custom spreadsheet, which I firmly believe that you will find useful.
Disclaimer: The following article and the methodology presented in it, is solely my own opinion and it shouldn’t be taken as financial advice.
Key evaluation metrics
Without further ado, I will show you the metrics that I use in order to determine whether a stock is good enough to enter my watchlist.
- ANNUALISED REVENUE GROWTH: A company’s revenue should increase on an annual basis. I believe any number higher than 10% as annualized growth is fantastic.
- ANNUALISED EBITDA GROWTH: A company’s EBITDA should also increase. After all, increasing the revenue but not increasing the income (EBITDA) is not a good indicator on the long-run. Companies need to make profits. You all know that, don’t you?
- LOW DEBT / FREE CASH FLOW: This ratio should be low. In fact a company should have both low debt and high free cash flow.
- HIGH ROE: Return on equity should definitely be high. After all, that’s why we invest. To get a high return.
- LOW DEBT / EBITDA: This ratio should be low and is similar to the DEBT / FREE CASH FLOW ratio. A company should have low debt and high EBITDA.
- EV / EBITDA: The lowest the value of this ratio, the better. This metric is also useful when you want to compare companies. The company with the lowest value wins. Many analysts compare the ratio to the industry’s average, to detect value stocks.
- ANNUALISED SHARES BUYBACK: I believe a company should buy their own shares, to decrease the amount of shares that are available to the investors, as this increases the ask price of the company’s stocks.
The Spreadsheet
In the next sections, I will not “talk” too much because I believe the pictures that I promised to show you are self-explanatory.
From the screenshots that I am about to show you, you will notice some fields in green color. Those are the fields that need to be manually filled using the latest financial statements of the company.
And when I say “latest financial statements”, I refer to the last decade. I mainly focus on the previous 10 years.
Descriptive metrics
We use the shares outstanding and the year average price, in order to calculate the annualized market-cap growth.
We want to see that:
- our company grows its market-cap on an annual basis.
- our company buys back shares (aka shares outstanding decrease).
Balance-sheet metrics
The Enterprise Value of the company is equal to its market-cap, plus the debt, minus the excess cash. The reason is simple… When you want to buy a company, you are obliged to buy its debt too, but you are able to pay the excess cash it has, to decrease the debt’s value. The shareholders equity is equal to total assets minus total liabilities.
Income statement metrics
The following image is simple to understand. The RoE is equal to net income divided by shareholder’s equity.
We want to see:
- annualized revenue growth.
- annualized EBITDA growth.
- low EV/EBITDA
- low DEBT/EBITDA
- high average ROE
Cash-flow statement metrics
We get the free cash flow adding operating cash flow and debt repayment. Then we subtract the capital expenditures.
We want to see:
- an increasing operating cash flow.
- low DEBT/FREE CASH FLOW.
Final metrics
In this section, we present the results of the 7 metrics we indicated in the previous chapter.
We can observe that the company we used has fantastic values in the key metrics we used. The annualized ebitda and revenue growth are spectacular. At the same time, the company has low debt and extremely high RoE. Therefore, I include it in my watchlist and I am willing to buy some shares in the near future.
Conclusion
I spent more than 3 years, trying to determine the aspects of a company that are sufficient to make it reach my watchlist and become a potential “buy”. The metrics I used above are the ones that I find to be the most useful. Let me know if you think of a better metric.
Oh… And by the way… Just for fun, try and guess the company that I used as in my example.
Clue: this company is responsible to rate other companies, governments and countries.
And the answer is …
