Four of the most important ratios in investing

Long_Equity
01-23

Four of the most important ratios in investing: $.SPX(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$ $.IXIC(.IXIC)$ $Invesco QQQ(QQQ)$ $NASDAQ 100(NDX)$ $.DJI(.DJI)$ $GLOBAL X DOW 30® COVERED CALL ETF(DJIA)$

1. FCF / Invested capital

2. FCF / Historic FCF

3. FCF / Revenue

4. FCF / Market capitalisation

If you had to add one, what would it be?

High growth companies normally have high multiples.

I created this table to show the relationship between growth and multiples👇

In short, a PE ratio of 50 requires a 20% earnings growth over 5 years to turn that multiple from 50 -> 20.

FYI, I use FCF yield - not P/E.

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Here’s my mental model for understanding

- growth

- return on capital

- margins

- valuation

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