The best Canadian companies to invest in will include blue chips, value stocks and growth stocks—and you can use these tips to spot the best of them

The best Canadian companies to invest in have strong business prospects and offer lower risk with high return potential.

Stocks like these give investors an additional measure of safety in volatile markets. And the best ones offer an attractive combination of low p/e’s, steady or rising dividend yields and promising growth prospects.

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Use these financial ratios to spot undervalued Canadian companies to invest in for the highest long-term returns

Price-earnings ratios: The p/e is the ratio of a stock’s market price to its per-share earnings. As a general rule, the lower the p/e, the better, and generally a p/e of less than 10 represents excellent value.

Meanwhile, to determine undervalued stock picks, we calculate the p/e ratio for a stock by using the most recent financial data. But we also analyze the “quality” of the earnings. For instance, we disregard a low p/e ratio if it is due to a one-time capital gain on the sale of assets, since the gain temporarily bloats the “e.” (That shrinks the p/e.)

Price-to-book-value ratios: The book value per share of a company is the value that the company’s books place on its assets, less all liabilities, divided by the number of shares outstanding. Book value per share gives you a rough idea of the stock’s asset value. This ratio represents a “snapshot” of an instance in time, and could change the next day. Note that asset values on a company’s books are the historical value of the assets when they were originally purchased, minus depreciation.

Price-cash flow ratios: Cash flow is actually a better measure of a company’s performance than earnings. While reported earnings are subject to accounting interpretation and can be restated in later years, cash flow is a measure of the cash flowing into a company with less cash outlays.

Debt to equity ratios: This ratio comes in several variations, but the basic idea is that you measure a company’s financial leverage by comparing its debt with its shareholders’ equity. In essence, you assume an attractive company can earn a higher return on its total capital than the interest rate it pays on the debt portion of its capital.

Here’s how to spot the characteristics of the best Canadian companies to invest in for growth

Many investors overlook a number of important factors that can considerably lower their risk and help them more successfully invest in growth stocks.

The tips below for lowering your growth investing risk have long been part of the advice we give you in our investment services and newsletters, including our flagship publication, The Successful Investor.

• Don’t overindulge in more aggressive investments.
• Be skeptical of companies that mainly grow through acquisitions.
• Keep stock market trends in perspective, and realize that while the market often anticipates trends, no trend lasts forever.
• Balance your cyclical risk by investing in some growth stocks that have freedom from business cycles.
• Keep an eye on a growth stock’s debt.
• Look for growth stocks that have ownership of strong brand names and an impeccable reputation.
• Industry prominence, if not dominance, should be a factor in choosing growth stocks to invest in.
• Dependable investments have the ability to serve all shareholders.
• Hidden value in undetected assets can lead to greater long-term returns.
• Top growth stocks have brand loyalty behind them.
• The best growth stocks should have the ability to profit from secular trends.

Target dividend-paying blue-chip stocks when searching for Canadian companies to invest in for the bulk of your portfolio

A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label. Dividends, after all, are much more stable than earnings projections. More importantly, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

The best blue chips offer both capital gains growth potential and regular dividend income. The dividend yield is certainly one of the most concrete indicators of a sound investment. It is the percentage you get when you divide the current yearly dividend payment by the share or unit price of the investment. It’s an indicator we pay especially close attention to when we select stocks to recommend in our investment newsletters.

Furthermore, taxpayers who hold Canadian dividend-paying stocks get a tax break. Their dividends can be eligible for the dividend tax credit in Canada. This means that dividend income will be taxed at a lower rate than the same amount of interest income.

Use our three-part Successful Investor approach to find Canadian companies to invest in 

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight. 

Which sector of the Canadian economy do you feel has the most potential for stock gains over the next few years?