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LONDON -- Though there isn't one surefire way to tell if a company is worth investing in, there are a few quick ways to see if you're looking at a dud or a stud.
You don't need a finance degree or a week off work to do this. You just need 20 minutes and a web browser, and you'll be all set to finding your next stock.
I've put popular U.K. share Unilever (LSE: ULVR ) (NYSE: UL ) under the microscope for today. I'm going to zoom in on three key things to know -- and in this case, like -- about a company that makes many of the products you and I keep in our cupboards.
Is Unilever making money?
In business, as in personal finance, how much money coming in is essential to being financially secure.
This money coming in is cash flow, and looking at a company's cash flows gives us, as current or potential shareholders, a sense of how well that company is doing at selling its wares.
In the case of Unilever, looking at its cash flows will give us a good sense of how many of its products -- think Dove soaps, Cif detergents, or Magnum ice cream -- are being sold to consumers like you and me from Asia to the U.K. to the U.S.
Looking at Unilever's cash flows over the past three years reveals, to me, a healthy and growing business that's spending money wisely to support its international expansion.
In 2010, the company -- which reports figures in euros – posted 3.8 billion euros in free cash flow. The following year, as Unilever began to invest more heavily to support its growth in emerging markets (think staff, distribution, and product innovation costs), free cash slid to 3.5 billion euros.
But in the most recent full-year filing for Unilever (2012), the company reported a healthy increase in free cash flow, rising to 4.7 billion euros in 2012.
The investment in emerging markets is paying off, as Unilever's sales growth outside Europe is up 11.4% and now represents 55% of the company's total turnover. Asia and Latin America continue to be good markets for Unilever.
Remember, companies that are making money can therefore typically afford to reinvest in their businesses -- as is the case with Unilever -- and return some of those profits in the form of dividends to you and me as shareholders.
How much debt does it have?
While you and I work hard to live debt-free, most companies that we invest in do carry debt. Sometimes a lot of debt. But that's not necessarily a bad thing.
When looking at a company's net debt -- its debt minus the cash it has in the bank -- you also want to see how easily it can pay down that debt.
In Unilever's case, it carries 7.4 billion euros in net debt (as reported at the end of 2012). This is down from 8.8 billion euros at the end of 2011 and up from 6.7 billion euros of debt in 2010.
While investing in a company that carries billions in debt may seem scary, remember that the company is also making billions each year. And in Unilever's case, it generated operating profits to the tune of a whopping 6.7 billion euros in 2012, a healthy debt-to-operating-profits ratio of about 1.1:1.
Is Unilever going to pay you dividends?
After looking at the money a company makes alongside what it owes, there's one final number to pay attention to in the case of income-generating shares like Unilever.
A dividend is cash paid to you (typically twice a year) as a shareholder of the company. You want to look for companies with a good track record of dividend growth and a good strong balance sheet to cover that dividend. Last year, Unilever paid out 2.7 billion euros in dividends, which was nicely covered 1.7 times by free cash flow.
Combine Unilever's strong cash flows, relatively low debt in relation to its operating profits, and healthy cash on the balance sheet (2.5 billion euros) and dividend investors can take comfort that the dividend is well-protected.
Though Unilever is one of the rare companies in the U.K. that pay quarterly dividends, let's take a look at the payouts over the past three years.
Unilever has increased its annual dividend from 71 pence per share in 2010 to 78 pence in 2011, and most recently it reached 79 pence in 2012. The company also upped its first-quarter 2013 dividend to 22.91 pence -- a 16% increase.
While Unilever's forecast yield of 3.2% trails the market average, this is mostly a reflection of the strong rise in share price in the past year. Following this analysis, income investors should be reassured that Unilever's dividend is safe. The question investors have to ask is, "Can the dividend continue to grow?"
And the verdict is in on Unilever!
Of course, anyone investing in Unilever today knows that it's all about what it can do from here.
The company has a long list of popular products that people know and love. It's building its brand internationally and has proven it will use its money wisely to expand into new markets. For me, it's a share I'll happily continue to own.
And great news for interested investors -- my fellow Motley Fool analysts seem to agree with me!
In fact, they've recently been asked to put together an exclusive list of shares that they believe you and I should put into our portfolios today... and Unilever has made the cut!
It's all inside the pages of our newest investing report, "5 Shares to Invest On," which includes details on Unilever as well as four other U.K. all-star stocks for you to consider.
It's free to download, so click here to claim your copy today.