3 Metrics for Picking Winners

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Comparing a company to its competitors can be tough, but with just three great metrics, you can get some idea of management's faith in the company's future and gauge how well they are managing their finances.

Those three metrics are operating margin, debt-to-equity ratio, and inside ownership. Today we'll look at a few of our favorite drug store chains. I've included Wal-Mart since most stores now contain a pharmacy, especially the smaller Wal-Mart Express stores. After the table, we'll talk about what these numbers tell us:


Operating Margin

Debt-to-Equity Ratio

Inside Ownership

Walgreen (NYSE: WAG  ) 5.43% 1.55 0.04%
CVS Caremark (NYSE: CVS  ) 5.73% 1.48 0.22%
Rite Aid (NYSE: RAD  ) 1% 1.75 24.2%
Wal-Mart Stores (NYSE: WMT  ) 5.94% 0.83 0.17%

Yahoo! Finance.

Operating margins
A company's operating margin tells you how much revenue it retains after all the operating expenses are taken out, which speaks to its efficiency.

As you can see in the table above, drug stores (and most other companies in the retail industry) operate on very low margins. CVS and Wal-Mart have relatively high margins, because they each have more diverse revenue streams and much larger scale.

Rite Aid's operating margin, on the other hand, should be especially alarming for investors. The company is barely breaking even, and digging a little deeper through its financial statements shows that this margin gets smaller and smaller each year. Buyer beware.

Debt-to-equity ratios
This metric measures how a company's shareholder equity compares to its debt obligations. A company with a high ratio has financed a larger part of its growth with debt. This can potentially increase earnings, but it also results in a larger, more worrisome debt burden to fulfill if earnings don't materialize.

Again, Wal-Mart's diversity and scale play to its benefit here, while Rite Aid is left toeing the line with its debtors. When you pair this ratio with the low operating margin we saw above, a picture of Rite Aid's bleak financial situation begins to form. It's becoming clear why the company is down more than 80% since 2007.

Inside ownership
How much of a company's stock is owned by its executives may not have a totally transparent impact on performance, but it's still an important metric to consider when researching companies. If management is in the same car as you, it's a safe assumption that they'll be less likely to let it crash and burn.

Surprisingly, Rite Aid takes home this trophy. But while the company's executives may be locked in with blind faith, this is one time investors shouldn't follow suit. Look instead to Wal-Mart -- or better yet, click here to read about "The Motley Fool's Top Stock for 2012," a retail company you may not know about with a very bright future.

Fool contributor Amanda Buchanan holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On June 13, 2012, at 2:17 AM, FreakyFrank wrote:

    While one can't argue that RAD's debt is a BIG problem, I think the low operating margin is the best way to steal customers from Walgreen & CVS - don't you??? Then after they have doubled their customer base, they can raise prices and be much more profitable, imho.

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