The One Foolish Metric We Can All Be Thankful For

Happy Thanksgiving!

| More on:
The Motley Fool

There are many, many different ways to analyze the quality of a business.  It can be overwhelming and I’m not sure about you, but I don’t like being overwhelmed, even though I have 3 young girls.

On this Thanksgiving eve, I’m going to make your life a little easier.  While you can pour over financial statements until you’re blue in the face, there is one number that will tell you almost everything you need to know about the quality of a business.

It’s called free cash flow, and you calculate it by taking cash flow from operations and subtracting capital expenditures.  To arrive at such an important number, the math doesn’t get much easier than that.

Simply, if a business is able to consistently generate free cash flow, there’s a good chance it’ll be a winner.  There’s an old stock trading saying that goes something like “you can’t go broke taking a profit”.  Well, if a company consistently pumps out free cash, that company ain’t going broke.  And neither are you if you invest in it.

It is from free cash that dividends are paid.  Stock is bought back.  Growth initiatives are undertaken.  A business that has free cash controls its own destiny.  A business that doesn’t is reliant on the kindness of strangers (ie. bankers) for all of these shareholder friendly acts.

Who has it?

Let’s now take a look at a few Canadian companies that have generated significant free cash in each of the past 10 years and how they have performed relative to the broad Canadian market over this period.  Of the 239 companies that make up the S&P/TSX Composite, there were just 50 that accomplished this feat, so right away you know you’re dealing in select company.  Five of the more prolific free cash generators over this period are included in the table below:

Company Name

Combined FCF (MM)

10 Yr Return

Current Yield





Teck Resources (TSX:TCK.B)








Rogers Communication   (TSX:RCI.B)




Potash Corp. (TSX:POT)




Source:  Capital IQ

When these returns are compared to the TSX’s 10-year return of 66.4%, we find that only BCE was not able to eclipse the index.  In fact, out of the entire group of 50, only 5 of the companies (including BCE) did not beat out the TSX over this 10-yr period.  And when dividends are considered, BCE drops off that list.

The Foolish Bottom Line

To beat the market, free cash is not always necessary.  However, if you want to increase your chances of achieving this feat, it certainly helps.  Though investing isn’t quite as easy as “find free cash flow, beat the market”, it’s also not as hard as some might have you believe.

Looking for more expert advice?

The Motley Fool Canada’s senior investment analyst just unveiled his top two stock ideas for new money now. And YOU can be one of the first to read his buy reports — just click here for all the details.

Fool contributor Iain Butler owns shares of Teck Resources and Potash.  David Gardner owns shares of CN Rail.  The Motley Fool does not own shares in any of the companies mentioned at this time.       

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing


2 Great REITs That Won’t Stay Cheap Forever

First Capital REIT (TSX:FCR.UN) and Automotive Properties REIT (TSX:APR.UN) are cheap real estate plays for yield-seeking Canadian investors.

Read more »

shopping online, e-commerce
Tech Stocks

Young Investors: Shopify (TSX:SHOP) Stock May Finally Be Worth Buying

Shopify (TSX:SHOP)(NYSE:SHOP) stock is attempting to stage a bottom, but should investors be buyers amid the market chaos?

Read more »

stock analysis

3 Ideal Stocks for Your Short-Term TFSA Growth Goals

Depending on what your short-term growth goals are, you can choose from the diverse pool of growth stocks, including linear…

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House

1 of the Cheapest REITs in Canada Looks Poised to Soar

H&R REIT (TSX:HR.UN) has become way too cheap to ignore for passive-income seekers who want a great deal from the…

Read more »

Early retirement handwritten in a note

TFSA Investors: 3 Top TSX Stocks to Buy Now for Early Retirement

Plan an early retirement by maximizing your TFSA and investing in solid stocks like CN Rail (TSX:CNR)(NYSE:CNI) for growth.

Read more »

Tech Stocks

How to Easily Turn a $25,000 RRSP Into $250,000

You can hold quality growth stocks such as Shopify in your RRSP and benefit from market-beating gains in the long…

Read more »

Retirement plan
Dividend Stocks

3 Retirement Stocks to Buy in Your 20s

A retirement stock is not necessarily something you buy when you retire. It also includes a broad spectrum of stocks…

Read more »

Dividend Stocks

Dividend Earners: Stay Invested in 2 Low-Volatility Stocks

Dividend earners can stay invested, despite the extreme market volatility provided they shift to two low-volatility stocks.

Read more »