Four of the most important ratios in investing
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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