Photo by Nicholas Cappello on Unsplash
*** I am not a financial advisor, and this is not financial advice. You should do your due diligence and research any stock before investing. ***
Recently I have been watching a lot of stock market investing content on YouTube in hopes of making better decisions. One channel I have especially been consuming is Everything Money. This channel has its hosts (Mo, Paul, & Seth) dive into a stock and provide a stock analysis to determine if there is a buying opportunity.
8 Pillars of Investing
Their core philosophy is the 8 Pillars which are 8 different metrics they use to determine a stocks value. These metrics do not necessarily guarantee that you will make a profit on a certain stock, but they are signs that a business is doing well.
1. 5 Year P/E Ratio < 22.5
This compares the market’s value per share divided by the earnings per share. Generally a higher p/e ratio means the company is overvalued or is pricing future growth. Currently the S&P 500 p/e ratio is 28.26. The guys at Everything Money look for companies with a ratio lower than 22.5 to give their picks room to grow.
2. 5 Year Return On Invested Capital > 9%
Return on invested capital is the percentage return on the capital invested by the company. This shows that the company is spending their capital wisely to make their business grow.
3. Revenue Growth 5 Year
Through the course of time a company should be increasing the amount of money they make.
4. Net Income Growth 5 Year
This is the amount of money you made(revenue) minus the amount of money it took to make your product. Net income should also be increasing over time.
5. Shares Outstanding
This shows the amount of shares available to buy. If a company needs cash sometimes they issue more shares. This dilutes the shares already out there in the market making them worth less. The Everything Money guys look for companies who are buying back shares over time. When there are less shares in the market the value of those shares increases.
6. Long Term Liabilities / 5 yr Free Cash Flow <5
Free cash flow is the cash from operations minus capital expenditures. The Everything Money guys multiple the free cash flow by 5 to get the amount of cash the company generates in 5 years. Then they compare it to the Long Term Liabilities like debt the company may have. If they have more cash than liabilities then it is a good sign because the debt can be paid off.
7. Cash Flow Growth 5 Year
Just like revenue and net income, free cash flow should increase over time. It shows that the company has money available to grow its’ business and pay down debts.
8. 5 Year Price to Free Cash Flow <20
Here the team takes the average free cash flow over the past 5 years and multiples it by 20. If the stocks market cap is lower than this number then it is positive.
Conclusion
Have you used any of the 8 metrics of investing to value your stocks? Comment below about the methods you use to value your stocks.
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