The 4 Ratios I Use to Find Great Companies
How do you know if a company is actually high quality? 🤔
You don’t look at it in isolation.
You compare it.
Against its peers.
Against competitors.
Against suppliers and customers.
And even against businesses that have almost nothing to do with it.
Comparison is what separates the companies that look good from the companies that actually stand out. 📊
For me, one of the biggest things I look for is what happens to free cash flow as a business grows.
Can revenue growth turn into faster FCF growth? 💰
Can FCF growth turn into faster FCF per share growth? 📈
That’s where things get really interesting.
Margin expansion can increase FCF.
Buybacks can reduce the share count and push FCF per share even higher.
And if the market eventually assigns a higher multiple, shareholders can benefit again.
So when I compare companies, these are the 4 FCF ratios I keep coming back to:
1️⃣ FCF / Invested Capital
Capital efficiency — how effectively does the company turn invested capital into cash?
2️⃣ FCF / Historic FCF
Growth — how quickly is the company actually growing its cash generation?
3️⃣ FCF / Revenue
Margin — how much of every dollar of revenue ultimately becomes free cash flow?
4️⃣ FCF / Market Capitalisation
Value — how much FCF am I getting relative to what the market is paying for the company?
Together, these give me a simple way to think about quality, growth, margins and valuation.
And the real edge comes from comparing those numbers across companies.
Because a great business isn’t necessarily the one with the best-looking metric in isolation.
It’s the one that keeps floating to the top when you compare it with everything else. 🧠
If you could add one more ratio to this list, what would it be? 👇
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