Using our Canadian value investing strategy will help you find stocks that are reasonably priced compared to sales, earnings or assets. Learn this strategy now.

Canadian value stocks are generally good bargains, but not all bargain stocks offer good value. The search for value stocks that will rise, and hold their value over time, begins with sound fundamental investing.

Succeed in Canadian value investing by starting with these metrics

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Investors interested in Canadian value investing should do more in-depth analysis of stocks that interest them by examining their financial data. Here are some key ratios:

Price-to-book ratio: 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 is a rough approximation of the actual value of the company’s assets. It represents a “snapshot” of an instant in time, and could change even the day after the financial statements are issued.

Asset values on a company’s books are the historical value of the assets when they were originally purchased, minus depreciation. Certain types of assets on a balance sheet might have actual market values well above historical values, as sometimes happens with real estate or patents.

When we find a stock with a low price to book value, we look to see if the price is too low, or if the book value per share is inflated. Most often, it’s because the price is too low. But, sometimes, assets are about to be written down. In that case, the stock should be avoided.

Price-sales ratio: This measure represents the ratio of share price to per-share sales and is not as widely known as the p/e, or price/book ratio. Still, it can be even more important in pinpointing an undervalued stock. Sales are more stable than earnings, so a company’s p/s ratio can tell you more about it than its p/e. Sales are less subject to manipulation by management or distortion by accounting rules. When a company’s shares trade for less than its per-share sales, it may be cheap. On the other hand, only a handful of companies are worth more than say, three times sales. But companies that deserve a high p/s may prove to be your best investments.

Price-cash flow ratio: Cash flow can actually be 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 really a measure of the cash flowing into a company less cash outlays. Simply put, it’s earnings without taking into account non-cash charges such as depreciation, depletion and the write-off of intangible assets over time. Cash flow is particularly useful in valuing companies in industries where depreciation and depletion charges are based on the historical value of assets, rather than current values—industries such as oil & gas and real estate.

When we’ve found a company that meets the value criteria above, we then look at other important factors that help determine the long-term value of the stock:

Meanwhile, you should also look at the Quality of the business: Once we’ve found a company that appears attractive on a value basis using these ratios detailed above, we look to see if it is a solid operating business, with rising sales, earnings and cash flows in a growing industry.

When looking at Canadian value investing key metrics, don’t forget a (sustainable) dividend yield 

One of the best ways of picking quality high dividend investments is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.

When you’re looking for income-producing stocks, dividend yield is typically your most important consideration—but not always.

Sometimes, it’s risky to buy a stock solely because it’s a high dividend stock. That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend-paying stock’s yield could be high simply because its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

Use our three-part Successful Investor approach, including for Canadian value investing, to boost your returns

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.

How much of your portfolio is dedicated to value investing?