There are a zillion ways to value a company. Price to earnings. Price to cash flow. Liquidation value. Price per eyeballs on website (big during the dot-com boom). Price to a number I completely made up (this one never gets old). Price to CEO's ego divided by lobbying activity as a percentage of revenue (this one doesn't get used enough).

Which one is best? Truth is, they're all limited and based on assumptions that could be horrendously wrong. No single metric, or even combination of metrics, holds everything you need to know.

The metric I'm using today is no different. But it's perhaps the most encompassing, and least susceptible to hidden complexities of a company's financial statements. The more I think about it, the more I feel it's one of the most important metrics an investor should use.

What is it? Unlevered cash flow to total enterprise value.

First, let's break apart what these words mean:

  • Unlevered cash flow: Free cash flow plus interest paid on outstanding debt.
  • Enterprise value: Market capitalization (share price times shares outstanding) plus total debt and minority interests, minus cash.

What does the ratio of these two statistics tell us? It tells us how much is being earned for all providers of capital -- both stockholders and bondholders.

I know what you're thinking: You invest in common stock, so why should you care about bondholders? Ask Lehman Brothers investors why. The answer is that bondholders stand in front of stockholders. When a company earns money, it has to take care of its bondholders before you, the common shareholder, gets one penny. Focusing solely on profits in relation to equity, then, can be misleading -- like getting excited about a sale, but being the 100th person in line at a store that could close any second. That's the danger of leverage.

Enterprise value, on the other hand, provides a more encompassing view. By bringing debt capital into the situation, we see real earnings in relation to the company's entire capital structure, not just the part you may be interested in. Put another way, combining enterprise value and unlevered free cash flow shows a company's full earnings power in relation to everyone who has a stake in that company. It's like getting excited about a sale and standing right at the cash register.

Using this metric, here are six companies I found that look attractive:


Enterprise Value / TTM Unlevered Free Cash Flow

5-Year Average

UnitedHealth (NYSE:UNH)






Raytheon (NYSE:RTN)



Pfizer (NYSE:PFE)






International Paper (NYSE:IP)



Source: Capital IQ, a division of Standard and Poor's.
*One skewing outlier year removed from average calculations.
TTM = trailing 12 months.

Are there caveats to this table? Oh yes. One, a company can boost reported cash flow by slashing capital expenditures. That helps in the short run, but can leave a company prone to needing to catch up in the future. Second, comparing one company's metric with another's might not be meaningful because of differences in capital structures. Third, I had to cherry-pick parts of this table because companies can report huge unlevered cash flow thanks to changes in net working capital. Ford (NYSE:F) was one such example.

The two examples I really like are UnitedHealth and Pfizer. Not only do the two look cheap compared with multiyear averages, but we know why they're cheap: political uncertainty on health-care reform.

Now, if you're from the camp that thinks Obamacare will incinerate the health-care industry as we know it, I offer you a tissue and a Glenn Beck T-shirt. But if you're like me, noticing that (a) proposed legislation isn't terribly detrimental to many health-care companies, and (b) the odds of proposed legislation actually passing appear to be waning, then these valuations might look really good.

More importantly, these stocks are pricing in pending health-care reform, so expected reform that doesn't happen is just icing on the cake for investors. It's the kind of "heads I win, tails I don't lose that much" scenario value investors look for.

What do you think? Share your thoughts in the comments section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Pfizer and UnitedHealth Group are Motley Fool Inside Value selections. Ford Motor and UnitedHealth Group are Motley Fool Stock Advisor recommendations. The Fool owns shares of UnitedHealth Group, and has a disclosure policy.