MENU

Fool Canada’s first 1,000%+ winner?

Our Chief Investment Advisor, Iain Butler, and a team of The Motley Fool’s most talented investors from across the globe recently embarked on an unprecedented mission:

To identify the 20 Canadian small-cap companies they believe have the best shot at earning investors like you gains of 1,000%+ over the coming years.

For the next few days only, you can get the names and full details on these 20 potential “10-baggers” when you join Iain and his team in a first-of-its-kind project they have dubbed Discovery Canada 2017.

Do This Simple Check Before Investing in Fortis Inc.

A couple of days ago I happened to be reading an article by Fool.ca contributor Nelson Smith about the three reasons to avoid Fortis Inc. (TSX:FTS), one of Canada’s best-performing utility stocks over the past 20 years.

Smith notes that there aren’t many stocks that have delivered 15.9% annually over the past 20 years, utility or otherwise. And he’s right. The TSX over the same period managed only single-digit returns.

Great stock, right? Not so fast.

He then goes on to mention three reasons to avoid Fortis stock; one being its level of debt, which has basically doubled in less than four years. With interest rates eventually set to rise, Fortis could be in a heap of trouble if it continues down this path.

However, there’s a simple check you can do that will tell you more about its ability to handle any interest rate increases and other unforeseen expenses.

It’s the funds-from-operations-to-debt ratio. It’s used by credit rating agencies to measure a company’s financial risk, including its ability to repay its debt using funds from operations.

It’s one thing to have $14 billion in debt; it’s another to have $14 billion in debt and no way to service the interest and principal costs on that debt. It’s a surefire path to going out of business.

Now, be forewarned. Some companies’ financial reports make it easier than others to find this information. Take Montreal-based utility Valener Inc. (TSX:VNR). It puts the information right there on page 40 of its Q3 2016 earnings report.

At the end of June Valener had $495.6 million in funds from operations over the trailing 12 months and total debt (less cash) of $3.1 billion for a ratio of 16%.

In other words, Valener generates 16 cents of funds from operations for every dollar of debt. Here, a higher percentage is definitely better.

Now, let’s take a look at Fortis. Unfortunately, it doesn’t provide this number, so we have to do a little digging.

Funds from operations are generally defined as cash flows related to operating activities less the net change in non-cash working capital items. Total debt is any bank loans, long-term debt, and the current portion of long-term debt less cash and cash equivalents.

Fortis has reported on two quarters this year, so we need to go as far back as Q3 2015 to get the 12-month number for funds from operations. That comes to $1.62 billion. Total debt less cash at the end of June was $11.3 billion.

This means Fortis generates 14 cents of funds from operations for every dollar of debt. A quick calculation of Emera Inc (TSX:EMA), a big rival to Fortis, shows that it’s got approximately 17 cents of funds of operations for every dollar of debt.

While a two- or three-cent difference might not seem like a lot, when you’ve got more than $11 billion in net debt compared to $3-4 billion, as is the case for Valener and Emera, you ought to at least consider the extra risk you’re taking owning its stock.

Track record and all.

Stock buy alert hits astounding 96% success rate!

The hand-picked investing team inside Stock Advisor Canada recently issued a buy alert for one special type of "bread-and-butter" stock where The Motley Fool U.S. has banked profits on 23 out of 24 recommendations. Frankly, with an astounding 96% success rate that has delivered average returns of 260%, chances are this new pick could deliver life-changing returns as well. Because the team at Stock Advisor Canada fully embraces the same time-tested investing philosophies that have led to countless Motley Fool winners globally. So simply click here to unlock the full details behind this new recommendation and join Stock Advisor Canada.

*96% accuracy includes restaurant stock recommendations from Motley Fool U.S. services Stock Advisor, Rule Breakers, Hidden Gems, Income Investor and Inside Value since each services inception. Returns as of 5/27/16.

Fool contributor Will Ashworth has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to find out how you can claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.