What are we looking for?
The highest wealth creators in the S&P/TSX composite index.
The screen
We searched the S&P/TSX for the top 20 companies by looking at the following metrics:
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.0. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- A return on capital of 10 per cent or greater;
- Cost of capital below 10 per cent. The economic value added (EVA) model considers both the cost of debt and the cost of equity;
- Positive free cash flow to capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flow, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent;
- The dividend yield is displayed for informational purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
Our S&P/TSX Top 20 is dominated by the information technology and consumer staples sectors, which make up almost half of the results alone. Dollarama (DOL), Constellation Software (CSU) and Computer Modelling Group (CMG) stand out with outstanding EPIs, all above 4.0. This basically means that every dollar of invested capital returns profits that are at least four times more important than what it costs the company to borrow money. For investors looking for equity income, CI Financial (CIX), Power Financial (PWF), Shaw Communications (SJR.B), North West Co. (NWC) and BCE (BCE) could be interesting options as they all yield more than 4 per cent while being in the top 20 S&P/TSX economic performers and generating positive free cash flow.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.