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While the extremely low rate environment and the ongoing economic uncertainty is driving more individuals to seek investments that pay out dividends, new investors would be wise to stop and try to get a handle on some of the key metrics discussed below. These ratios could prove to be very useful in the selection process and potentially keep you out of harm's way.

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 for 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.

Free cash flow yield is obtained by dividing free cash flow per share by the current price of each share. Generally lower ratios are associated with an unattractive investment and vice versa. Free cash flow takes into account capital expenditures and other ongoing costs associated with the day to day to functions of the business. In our view free cash flow yield is a better valuation metric then earnings yield because of the above factor

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 pay out 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. Individuals searching for other ideas might find this article to be of interest Reasons To Be Bullish On Hatteras Financial Corp

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to cash flow ratio is obtained by dividing the share price by cash flow per share. It is a measure of the market's expectations of a company's future financial health. The effects of depreciation and other non cash factors are removed, and this makes it easier for investors to assess foreign companies in the same industry. This ratio also provides a measure of relative value like the price to earning's ratio.

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.

Asset turnover is calculated by dividing revenues by assets. It measures a firm's effectiveness at using its assets in generating revenue. Higher numbers are generally better and vice versa. In general companies with low profit

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 Acacia Research Corporation: A Long-Term Growth Play?

Our favourite play on the list is Royal Gold, Inc. (NASDAQ:RGLD) and we like it for the following reasons:

  • It boosts a strong dividend three year growth rate of 18.42%
  • A positive levered free cash flow of $5.13 million
  • Net income has almost doubled since 2009; in 2011 it stood at $71 million compared to $38 million in 2009.
  • EBTIDA has increased from $97 million in 2009 to $191 million in 2011
  • Cash flow from operating activities has surged almost 500% from its 2009 levels of $30.5 million in comparison to the 2011 figure of $146 million.
  • Cash flow per share has doubled from $1.25 in 2009 to $2.55 in 2011
  • A good quarterly earnings and revenue growth rate of 27% and 22% respectively.
  • It sports a great quick and current ratio of 5.5 and 5.87 respectively
  • It has an excellent payout ratio of 28% and very strong interest coverage ratio of 25
  • A strong five year sales growth of 41%
  • A low long term debt to equity ratio of 0.18
  • A good fiver year EPS growth rate of 14.35%
  • Consecutive dividend increases for 10 years
  • A strong total 3 and 5 year total return of 78% and 121%
  • A decent free cash flow yield of 4.5%
  • The high end EPS estimates for 2012 and 2013 are $2.19 and $2.90 respectively, while the average for 2012 and 2013 stands at $1.90 and $2.38 respectively.
  • 100K invested for 10 years would have grown into a whopping $1.34 million dollars.

Royal Gold, Inc.

Industry: Precious Metals

Levered Free Cash Flow: 5.13M

Net income for the past three years

Net Income 2009 = $38 million

Net Income 2010 = $21 million

Net Income 2011 = $71 million

EBITDA 12/2011 = $191 million

EBITDA 12/2010 = $101 million

EBITDA 12/2009 = $97 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2009 = $30.05 million

2010 = $48.38 million

2011 = $146.96 million

Cash Flow 12/2011 = 2.55 $/share

Cash Flow 12/2010 = 1.7 $/share

Cash Flow 12/2009 = 1.25 $/share

Anl EPS before NRI 12/2011 = 1.29

Anl EPS before NRI 12/2010 = 0.82

Anl EPS before NRI 12/2009 = 0.52

Anl EPS before NRI 12/2008 = 0.84

Anl EPS before NRI 12/2007 = 0.79

ROE = 5.92%

Return on Assets = 4.6%

Quarterly Earnings Growth = 27.8%

Quarterly Revenue Growth = 22.2%

Key Ratios

Price to Sales = 15.87

Price to Book = 2.42

Price to Tangible Book = 2.64

Price to Cash Flow = 26.22

Price to Free Cash Flow = -213.5

Current Ratio 09/2011 = 5.5

Current Ratio 5 Year Average = 17.39

Quick Ratio = 5.87

Cash Ratio = 4.17

Interest Coverage 09/2011 = 24.94

Payout Ratio 09/2011 = 0.28

Payout Ratio 06/2011 = 0.3

Payout Ratio 5 Year Avg 09/2011 = 0.41

Payout Ratio 5 Year Avg 06/2011 = 0.41

Change in Payout Ratio = -0.13

Dividend growth rate 3 year avg = 18.42%

Consecutive dividend increases = 10 years

Paying dividends since = 2000

Total return last 3 years = 78.15%

Total return last 5 years = 120.09%

Compania de Minas Buenaventura (NYSE: BVN

Industry : Precious Metals

Levered Free Cash Flow: 168.49M

Net income for the past three years

Net Income 2009 = $657 million

Net Income 2010 = $663 million

Net Income 2011 = $964 million

EBITDA 12/2011 = $1283 million

EBITDA 12/2010 = $928 million

EBITDA 12/2009 = $822 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2008 = $150.52 million

2009 = $526.13 million

2010 = $527.75 million

Cash Flow 12/2011 = 3.76 $/share

Cash Flow 12/2010 = 2.89 $/share

Cash Flow 12/2009 = 2.62 $/share

Anl EPS before NRI 12/2011 = 3.39

Anl EPS before NRI 12/2010 = 2.61

Anl EPS before NRI 12/2009 = 2.33

Anl EPS before NRI 12/2008 = 2.95

ROE = 26.9%

Return on Assets = 23.31%

Quarterly Earnings Growth = 3.6%

Quarterly Revenue Growth = 1.4%

Key Ratios

Price to Sales = 6.61

Price to Book = 2.98

Price to Tangible Book = 3.48

Price to Cash Flow = 10.65

Price to Free Cash Flow = 52.3

Current Ratio 09/2011 = 3.02

Current Ratio 5 Year Average = 3.25

Quick Ratio = 2.55

Cash Ratio = 2.02

Interest Coverage 09/2011 = 44.27

Payout Ratio 09/2011 = 0.16

Payout Ratio 06/2011 = 0.14

Payout Ratio 5 Year Avg 09/2011 = 0.13

Payout Ratio 5 Year Avg 06/2011 = 0.13

Change in Payout Ratio = 0.03

Dividend growth rate 3 year avg = 63.11%

Dividend growth rate 5 year avg = 35%

Consecutive dividend increases = 2 years

Paying dividends since = 1996

Total return last 3 years = 119.94%

Total return last 5 years = 204.59%

Gold Fields Ltd. (NYSE:GFI)

Industry : Precious Metals

Levered Free Cash Flow: 478.66M

Net income for the past three years

Net Income 2009 = $210 million

Net Income 2010 = $-75 million

Net Income 2011 = $1081 million

EBITDA 12/2010 = $405 million

EBITDA 12/2009 = $628 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2009 = $634.9 million

2010 = $1.17 billion

2010 = $808.3 million

Cash Flow 12/2011 = 2.49 $/share

Cash Flow 12/2010 = 1.08 $/share

Cash Flow 12/2009 = 0.89 $/share

Anl EPS before NRI 12/2011 = 1.39

Anl EPS before NRI 12/2010 = 0.54

Anl EPS before NRI 12/2009 = 0.47

Anl EPS before NRI 12/2008 = 0.54

Anl EPS before NRI 12/2007 = 0.53

ROE = 16.65%

Return on Assets = 9.73%

Quarterly Revenue Growth = 32.5%

Key Ratios

Price to Sales = 1.82

Price to Book = 1.78

Price to Tangible Book = 1.94

Price to Cash Flow = 5.86

Price to Free Cash Flow = 71.5

Current Ratio 09/2011 = 1.17

Current Ratio 5 Year Average = 1.17

Quick Ratio = 1.17

Cash Ratio = 1.17

Interest Coverage 09/2011 = 31.51

Payout Ratio 09/2011 = 0.17

Payout Ratio 06/2011 = 0.3

Payout Ratio 5 Year Avg 09/2011 = 0.38

Payout Ratio 5 Year Avg 06/2011 = 0.39

Change in Payout Ratio = -0.2

Dividend growth rate 3 year avg = 35.81%

Consecutive dividend increases = 2 years

Paying dividends since = 1990

Total return last 3 years = 39.03%

Total return last 5 years = -7.41%

Barrick Gold Corp. (NYSE:ABX)

Industry : Precious Metals

Levered Free Cash Flow : 336.33M

Net income for the past three years

Net Income 2009 = $-4274 million

Net Income 2010 = $3274 million

Net Income 2011 = $4537 million

EBITDA 12/2011 = $8784 million

EBITDA 12/2010 = $5904 million

EBITDA 12/2009 = $-2500 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2008 = $2.21 billion

2009 = $-2322 million

2010 = $4.13 billion

Cash Flow 12/2011 = 6.09 $/share

Cash Flow 12/2010 = 4.54 $/share

Cash Flow 12/2009 = 2.83 $/share

Anl EPS before NRI 12/2011 = 4.67

Anl EPS before NRI 12/2010 = 3.32

Anl EPS before NRI 12/2009 = 1.9

Anl EPS before NRI 12/2008 = 1.89

Anl EPS before NRI 12/2007 = 1.96

ROE = 19.54%

Return on Assets = 10.57%

Quarterly Earnings Growth = -0.2%

Quarterly Revenue Growth = 25.8%

Key Ratios

Price to Sales = 3.2

Price to Book = 1.79

Price to Tangible Book = 3.72

Price to Cash Flow = 7.53

Price to Free Cash Flow = -13.6

Current Ratio 09/2011 = 2.25

Current Ratio 5 Year Average = 3.04

Quick Ratio = 1.39

Cash Ratio = 1.24

Interest Coverage 09/2011 = 3.86

Payout Ratio 09/2011 = 0.13

Payout Ratio 06/2011 = 0.11

Payout Ratio 5 Year Avg 09/2011 = 0.17

Payout Ratio 5 Year Avg 06/2011 = 0.17

Change in Payout Ratio = -0.04

Dividend growth rate 3 year avg = 12.14%

Dividend growth rate 5 year avg = 21%

Consecutive dividend increases = 2 years

Paying dividends since = 1990

Total return last 3 years = 69.21%

Total return last 5 years = 71.71%

Newmont Mining Corp. (NYSE:NEM)

Industry : Precious Metals

Levered Free Cash Flow : 1.12B

Net income for the past three years

Net Income 2009 = $1297 million

Net Income 2010 = $2277 million

Net Income 2011 = $366 million

EBITDA 12/2011 = $3090 million

EBITDA 12/2010 = $5221 million

EBITDA 12/2009 = $3880 million

Net income Reported Quarterly = $231 million

Total cash flow from operating activities

2009 = $2.95 billion

2010 = $3.17 billion

2011 = $3.59 billion

Cash Flow 12/2011 = 6.57 $/share

Cash Flow 12/2010 = 5.84 $/share

Cash Flow 12/2009 = 4.51 $/share

Anl EPS before NRI 12/2011 = 4.33

Anl EPS before NRI 12/2010 = 3.78

Anl EPS before NRI 12/2009 = 2.79

Anl EPS before NRI 12/2008 = 1.99

Anl EPS before NRI 12/2007 = 1.28

ROE = 13.13%

Return on Assets = 7.74%

Earnings per share 5 year growth rat= 29.49%

5 year sales growth rate= 17.05%

Key Ratios

Price to Sales = 2.69

Price to Book = 1.76

Price to Tangible Book = 2.22

Price to Cash Flow = 8.66

Price to Free Cash Flow = -13.1

Current Ratio 09/2011 = 1.37

Current Ratio 5 Year Average = 2.03

Quick Ratio = 1.19

Cash Ratio = 1.03

Interest Coverage = 8.5

Payout Ratio 09/2011 = 0.32

Payout Ratio 06/2011 = 0.28

Payout Ratio 5 Year Avg 09/2011 = 0.21

Payout Ratio 5 Year Avg 06/2011 = 0.2

Change in Payout Ratio = 0.11

Dividend growth rate 3 year avg = 41.67%

Dividend growth rate 5 year avg = 17%

Consecutive dividend increases = 2 years

Paying dividends since = 1934

Total return last 3 years = 56.21%

Total return last 5 years = 41.48%

Conclusion

The markets are extremely overbought and trending up on rather low volume: This is not a good sign as the market should trade to new highs on strong volume and not on fumes as is currently the case. Long-term investors would be best served by waiting for a strong pullback before committing funds to this market.

EPS, Price, EPS surprise charts obtained from zacks.com. Dividend history charts sourced from dividata.com. Free cash flow yield, income from continuing operations and revenue growth charts sourced from Ycharts.com. Earnings estimates and growth rate charts for sourced from dailyfinance.com. A major portion of the historical data used in this article was obtained from zacks.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Dislclaimer: 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 Precious Metals Plays With Excellent Growth Potential