Long-Term Investors: 4 Key Metrics to Evaluate Businesses

Knowing which metrics to use to value stocks is key and will help you to identify value stocks such as Russel Metals Inc (TSX:RUS).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Knowing which metrics to use to evaluate a company or understanding what they mean when reading reports is key for investors if they want to identify the best companies. There are tons of different metrics out there — some for value investors, some for growth, and some to check on the stability of a company.

Below are the most popular metrics for evaluating value stocks, what they mean, and what they measure.

Price to earnings

The price-to-earnings (P/E) ratio is always the most basic. It’s so popular because it’s easy to understand and gives you a quick snapshot to know what you’re dealing with.

Of course, just like any other metric it only shows you a small portion of the company’s current situation and should be used with other metrics or as a starting point to do further research.

For example, you may notice a company in a mature industry with an unusually high P/E ratio, but its stock has been falling for the last while. At first glance, it may seem overvalued, but doing further research would indicate it had a bad quarter or two of earnings, which brought its P/E up.

This is a major difference and could present a buying opportunity if the company can turn itself around.

Price to book

This is a measure of the company’s market price divided by its value on paper, or book value. The book value is the equity value determined by taking assets and subtracting liabilities. It’s a helpful metric to know how much you are overpaying and what your margin of safety is if the assets would have to be sold off.

It’s very important to understand though, that in the unlikely event of a liquidation, the company will most likely not see the total value amount of its assets, as some of the goodwill and intangible assets may not be bought for full price, especially if the company is being dissolved.

Similarly, to price to book is the enterprise value, which gives investors a good idea of the company’s total worth including debt.

Enterprise value

EV is taken by adding net debt to the market cap and subtracting for cash. It is used as a way for analysts or investors to gauge how much a company really will cost you to buy it.

Enterprise value on its own isn’t that useful, but combining it with something like earnings before interest, taxes, depreciation, and amortization (EBITDA) then allows you to view the total worth of companies and compare a number of them.

EBITDA

EBITDA is becoming increasingly more popular among investors and analysts. It’s so popular because it’s one of the best ways to analyze the operations of businesses.

It’s especially useful when evaluating many businesses in an industry or when looking at the EBITDA margin of sales.

It’s also useful for forming the basis of valuations such as EV/EBITDA or net debt to EBITDA, because it’s a recurring rate that should be able to be continuously met with better consistency than earnings numbers.

It’s also useful because it can be tweaked for different industries, subtracting the depreciation and amortization or adding rent to it for industries such as airlines.

A top example

Looking at a company such as Russel Metals (TSX:RUS) and using metrics to evaluate it, it’s immediately clear the company has value at these prices. Its P/E ratio is just 7.5 times, well below its five-year average of 13.6 times. Its price to book is also cheap at just 1.4 times.

The EV/EBITDA confirms its value as it stands at less than six times, especially compared to its historical rate above eight times.

Russel Metals is a top Canadian metals processing and distribution company. It has been growing its earnings incredibly fast the last few years and continues to offer investors tons of value. It even pays a dividend that yields roughly 7%.

Bottom line

Using key metrics are a great way to analyze the numbers and compare numerous companies to figure out which is best. It’s also useful to see how cheap the company is on a historical basis when comparing it to itself.

Should you invest $1,000 in Aurora Cannabis right now?

Before you buy stock in Aurora Cannabis, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Aurora Cannabis wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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.

Fool contributor Daniel Da Costa has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

A worker overlooks an oil refinery plant.
Dividend Stocks

Where I’d Put $10,000 in Top Canadian Energy Stocks This April for Dividend Income

These three energy stocks are ideal for income-seeking investors, given their solid cash flows and consistent dividend growth.

Read more »

An investor uses a tablet
Dividend Stocks

This Could Be the Top Canadian Dividend Stock to Buy Right Now

Here's why I think Enbridge (TSX:ENB) remains a top option for dividend investors in this current macroeconomic climate.

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

How I’d Invest My $7,000 TFSA Across These 3 Canadian Stocks for Dividend Income

Investors looking for Canadian stocks for dividend income that can last decades should consider buying these three stocks today.

Read more »

A worker uses a double monitor computer screen in an office.
Dividend Stocks

National Bank vs. Bank of Montreal: How I’d Divide $12,000 Between Banking Stocks

Here's how I would think about splitting up a $12,000 prospective investment in National Bank of Canada (TSX:NA) and Bank…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

Canadian National Railway: How I’d Approach This Blue-Chip With $10,000 in 2025

Despite current macro headwinds, Canadian National Railway remains a rock solid, blue-chip pick for long-term investing.

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

April Income Strategy: Where to Invest $10,000 in Big Dividend Stocks

These stocks offer attractive yields for income investors.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

How I’d Invest $50,000 in TFSA Cash for 2025

Looking to get started with a TFSA? Here's exactly how to get going with these top stocks.

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Here’s the Maximum Amount Canadians Could Have in a TFSA

Just because you hit the max of your TFSA doesn't mean that's what it's worth. Here's how to make even…

Read more »