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Investors should familiarize themselves with the following ratios, as they could prove to be extremely useful and helpful in the selection process. Understanding what these ratios mean could make the difference between spotting a winner or a loser.

Enterprise value is a combination of the market cap, debt, minority interests, preferred shares less total cash and cash equivalents. This provides a better picture because it is a more accurate representation of a company's value contrary to simply looking at the Market cap.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balances sheet is very important, as it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall and cash levels increase, the balance sheet is said to be improving, and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring. If your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest: 5 Solid Stocks With Great Yields

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example, if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Inventory turnover is calculated by dividing sales by inventory. If a company generated $30 million in sales and had an average inventory of $6 million, the inventory turn over would be equal to 5. This value indicates that there are 5 inventory turnovers per year. This means that it takes roughly 2.4 months to sell the inventory. A low inventory turnover is a sign of inefficiency, and vice versa.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to.

Quick ratio or acid test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article 5 Great Plays With Grand Yields

Bank of Montreal (BMO) is our play of choice for the following reasons:

  • It has a good 5 year dividend rate of 6.3%
  • A decent 5 year growth average of 4.65%
  • A good quarterly revenue growth rate of 20%
  • A quarterly earnings growth rate of 21%
  • A low payout ratio of 51%
  • A good LT debt to equity ratio of 0.23
  • Net income and operating cash flow have generally been trending upwards for the past few years
  • It has a very long dividend history; it has been paying dividends since 1829
  • 100k Invested for 10 years would have grown to 270K

Stock

Dividend Yield (%)

Forward PE

EBITDA

Quarterly Revenue Growth

Beta

Revenue

Operating Cash flow

BMO

4.80

9.37

8.25B

20.70%

1.45

12.70B

564.66M

BCE

5.50

12.22

7.46B

8.70%

0.57

19.0B

4.88B

YPF

10.50

7.60

3.25B

34.50%

0.79

12.36B

2.86B

NZT

11.90

15.5

1.38B

-5.10%

1.00

4.16B

1.13B

DCT

5.00

13.50

159.43M

10.90%

1.47

250.89M

N/A

Bank of Montreal

Industry: Banking

Free cash flow = $-67 million

Net income for the past three years

  • 2009 = $1.66 billion
  • 2010 = $2.76 billion
  • 2011 = $3.29 billion

Total cash flow from operating activities

  • 2009 = $11.88 billion
  • 2010 = $-6.47 billion
  • 2011 = $.58 billion

Key Ratios

  • P/E Ratio11
  • P/E High - Last 5 Yrs21.6
  • P/E Low - Last 5 Yrs6.8
  • Price to Sales2.11
  • Price to Book1.47
  • Price to Tangible Book1.84
  • Price to Cash Flow11.90
  • Price to Free Cash Flow-33.50

  • Quick Ratio N.A.
  • Current Ratio N.A.
  • LT Debt to Equity 0.23
  • Total Debt to Equity 0.23
  • Interest Coverage 2.1
  • Inventory Turnover N.A.
  • Asset Turnover 0
  • ROE 12.67%
  • Return on Assets 0.75%
  • Total debt 96.87B
  • Book value 39.03
  • Qtrly Earnings Growth 21.40%

  • Dividend yield 5 year average6.30%
  • Dividend rate$ 2.80
  • Payout ratio53.00%
  • Dividend growth rate 5 year avg4.65%
  • Paying dividends since1829
  • Total return last 3 years180%
  • Total return last 5 years 17%

BCE Inc. (BCE)

Industry: Services

It has a levered free cash flow rate of $1.07 billion

Net income for the past three years

  • 2008 = $.77 billion
  • 2009 = $1.66 billion
  • 2010 = $2.29 billion

Total cash flow from operating activities

  • 2008 = $4.9 billion
  • 2009 = $4.66 billion
  • 2010 = $4.75 billion

Key Ratios

  • P/E Ratio13.9
  • P/E High - Last 5 Yrs 48.2
  • P/E Low - Last 5 Yrs5
  • Price to Sales1.60
  • Price to Book3.04
  • Price to Tangible Book-6.73
  • Price to Cash Flow5.80
  • Price to Free Cash Flow-23.60

  • Quick Ratio 0.6
  • Current Ratio 0.8
  • LT Debt to Equity 1.21
  • Total Debt to Equity 1.42
  • Interest Coverage 2.8
  • Inventory Turnover 2.24
  • Asset Turnover 0.5
  • ROE 16.70%
  • Return on Assets 6.63%
  • Total debt 14.78B
  • Book value 13.35
  • Qtrly Earnings Growth 40.30%

  • Dividend yield 5 year average 4.70%
  • Dividend rate $2.17
  • Payout ratio 73%
  • Dividend growth rate 3 year avg 47.99%
  • Dividend growth rate 5 year avg 43.04%
  • Consecutive dividend increases 5 years
  • Paying dividends since 2006
  • Total return last 3 years 140.94%
  • Total return last 5 years 98.85%

Notes

A strong levered free cash flow of $1.07 billion, a great quarterly earnings growth of 40%, a manageable payout ratio of 73%, and a great 3 year return of 140%. On the negative side it sports a weak quick and current ratio of 0.6 and 0.8 respectively.

YPF SA (YPF)

Industry: Refining & Marketing

Levered Free Cash Flow: -235.57M

Net income for the past three years

  • 2008 = $874.67 million
  • 2009 = $971 million
  • 2010 = $1.46 billion

Total cash flow from operating activities

  • 2008 = $3.92 billion
  • 2009 = $2.48 billion
  • 2010 = $3.21 billion

Key Ratios

  • P/E Ratio = 28.6
  • P/E High - Last 5 Yrs = 20.3
  • P/E Low - Last 5 Yrs = 6.8
  • Price to Sales = 4.05
  • Price to Book = 2.54
  • Price to Tangible Book = 2.54
  • Price to Cash Flow = 7.5
  • Price to Free Cash Flow = -14.1

  • Quick Ratio = 0.5
  • Current Ratio = 0.9
  • LT Debt to Equity = 0.18
  • Total Debt to Equity = 0.51
  • Interest Coverage = 7.8
  • Inventory Turnover = 0.7
  • Asset Turnover = 0.3
  • ROE = 26.49%
  • Return on Assets = 11.42%
  • 200 day moving average = 36.18
  • Total debt = 2.42B
  • Book value = 12.14
  • Qtrly Earnings Growth = 14.1%

  • Dividend yield 5 year average = 10.7%
  • Dividend rate = $ 3.39
  • Payout ratio = 287%
  • Dividend growth rate 3 year avg = -16.75%
  • Dividend growth rate 5 year avg = 7.09%
  • Consecutive dividend increases = 1 years
  • Paying dividends since = 1993
  • Total return last 3 years = 5.45%
  • Total return last 5 years = 14.11%

Notes

It has a high payout ratio, but so far the operating cash flow is more than enough to cover its dividend obligations. It sports a negative 3 year dividend growth rate and a weak quick ratio. The interest coverage is not bad at 7.8. Net income has been rising for the past 3 years. There is talk about nationalizing this company; investors should take this into consideration also before deploying any money this play. In our opinion, the risk to reward ratio is not in favour of opening up long positions, at least not in the near future.

Telecom Corp. of New Zealand L (NZT)

Industry: Services

Levered Free Cash Flow: 36.01M

Net income for the past three years

  • 2009 = $258.88 million
  • 2010 = $261 million
  • 2011 = $135 million

Total cash flow from operating activities

  • 2009 = $1.01 billion
  • 2010 = $1.22 billion
  • 2011 = $1.12 billion

Key Ratios

  • P/E Ratio = 23.9
  • P/E High - Last 5 Yrs = 27.6
  • P/E Low - Last 5 Yrs = 2.1
  • Price to Sales = 0.81
  • Price to Book = 1.8
  • Price to Tangible Book = 3.42
  • Price to Cash Flow = 3.5
  • Price to Free Cash Flow = 38.8

  • Quick Ratio = 0.6
  • Current Ratio = 0.7
  • LT Debt to Equity = 0.74
  • Total Debt to Equity = 0.91
  • Interest Coverage = 2.4
  • Inventory Turnover = 32.6
  • Asset Turnover = 0.8
  • ROE = 6.84%
  • Return on Assets = 5.88%
  • 200 day moving average = 9.45
  • Total debt = 2.29B
  • Book value = 5
  • Qtrly Earnings Growth = -100%

  • Dividend yield 5 year average = 12.8%
  • Dividend rate = $ 0.71
  • Payout ratio = 157%
  • Dividend growth rate 3 year avg = -6.6%
  • Dividend growth rate 5 year avg = -24.04%
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 1991
  • Total return last 3 years = 62.68%
  • Total return last 5 years = -20.77%

DCT Industrial Trust Inc (DCT)

Industry: REITs

Free Cash Flow : $-110 million.

Net income for the past three years

  • 2008 = $9.49 million
  • 2009 = $-18.59 million
  • 2010 = $-37.83 million
  • 2011= It stands at $-29 million and losses could top the $-40 million mark.

Total cash flow from operating activities

  • 2008 = $128.35 million
  • 2009 = $109.75 million
  • 2010 = $91.01 million
  • 2011= It stands at $79 million and could top the $109 mark.

Key Ratios

  • P/E Ratio = N.A.
  • P/E High - Last 5 Yrs = N.A.
  • P/E Low - Last 5 Yrs = N.A.
  • Price to Sales = 5.54
  • Price to Book = 1.13
  • Price to Tangible Book = 1.13
  • Price to Cash Flow = -33.6
  • Price to Free Cash Flow = -8.2
  • Quick Ratio = N.A.
  • Current Ratio = 0.46
  • LT Debt to Equity = 1.01
  • Total Debt to Equity = 1.05
  • Interest Coverage = 0.3
  • Inventory Turnover = N.A.
  • Asset Turnover = 0.1
  • ROE = -2.6%
  • Return on Assets = 0.69%
  • 200 day moving average = 18.79M
  • Total debt = 1.25B
  • Book value = 4.91
  • Qtrly Earnings Growth = N/A

  • Dividend yield 5 year average = 8.1%
  • Dividend rate = $ 0.28
  • Dividend growth rate 3 year avg = -17.7%
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 2006
  • Total return last 3 years = 94.96%
  • Total return last 5 years = -34.71%

Notes

Net income has turned negative for two years, going on 3 years; it has a negative 3 dividend growth rate and a weak interest coverage ratio. On the bright side it has a 5 year dividend average of 8.1% and operating cash flow has been enough to more than cover the dividend payments for the last two years. In our opinion there are better plays out there.

Conclusion

BMO and DCT sport high betas which make them good candidates for covered writes; higher beta stocks usually command higher option premiums.

EPS, EPS surprise and book value charts provided by Zacks.com. Dividend history charts provided by dividata.com

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies -- let the buyer beware.

Source: 5 Solid Plays With Great Yields