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

data analyze research
Bank Stocks

Better Buy: Royal Bank Stock or Bank of Nova Scotia?

Bank stocks appear cheap after the latest plunge. Is Royal Bank or Bank of Nova Scotia a buy today?

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

3 Stocks to Anchor Your Portfolio in a Rocky Market

Three stocks are solid anchors in any portfolio today for their outperformance in a weak market and defiance of the…

Read more »

Metals and Mining Stocks

Better Metals Buy: Gold Stocks vs. Lithium Stocks

Gold is the evergreen choice as a hedge against inflation and weak markets. In contrast, battery metals may offer unique…

Read more »

Man making notes on graphs and charts
Bank Stocks

TD Bank Stock: A TSX Top Pick Amid U.S. Banking Rout?

TD Bank (TSX:TD) stock could prove a worthy bet for brave investors who aren't fearful over the recent wave of…

Read more »

edit Sale sign, value, discount
Tech Stocks

2 Cheap Tech Stocks to Buy Right Now

Many tech stocks offer exceptional returns compared to other stock sectors when the market is bullish. You can add to…

Read more »

money cash dividends
Dividend Stocks

3 Solid Dividend Stocks That Cost Less Than $30

Given their solid financials and healthy cash flows, the following under-$30 dividend stocks are a good buy in this volatile…

Read more »


Is Now the Right Time to Buy Fortis Stock?

Fortis stock looks cheap today. Should you buy now or wait?

Read more »

edit Woman calculating figures next to a laptop

TFSA Investors: 2 Stocks to Make the Most of a Sad-Trombone Economy

TFSA investors can make the most of the heightened volatility by taking positions in stocks with tremendous resiliency amid the…

Read more »