Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples
  • The consistency of past earnings and cash flow
  • How much growth we can expect

Let's see what those numbers can tell us about how expensive or cheap Archer Daniels Midland (NYSE: ADM) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Archer Daniels Midland has a P/E ratio of 10.7 and a negative EV/FCF ratio over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Archer Daniels Midland has a P/E ratio of 10.5 and a negative five-year EV/FCF ratio.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Archer Daniels Midland has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Archer Daniels Midland

10.7

NM

10.5

NM

Bunge (NYSE: BG)

4.3

NM

9.0

NM

ConAgra Foods (NYSE: CAG)

13.4

12.4

12.7

25.0

Corn Products International (NYSE: CPO)

19.4

8.3

21.9

26.6

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how Archer Daniels Midland's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Archer Daniels Midland's net income margin has ranged from 1.8% to 4.6%. In that same time frame, unlevered free cash flow margin has ranged from -4.3% to 1.6%.

How do those figures compare with those of the company's peers? See for yourself:

Admmarginranges


Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the past five years, Archer Daniels Midland has tallied up five years of positive earnings and three years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Archer Daniels Midland has put up past EPS growth rates of 13.5%. Meanwhile, Wall Street's analysts expect future growth rates of 10%.

Here's how Archer Daniels Midland compares to its peers for trailing five-year growth:

Admtrailing


Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years (no analyst estimates for Corn Products International):

Adm


Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Archer Daniels Midland are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 10.7 P/E ratio.

The numbers that jump out for Archer Daniels are its negative free cash flows. Its capital expenditures are exceeding its depreciation and amortization costs. The next question if you choose to continue your due diligence is whether those capital expenditures will result in tangible results -- e.g. ample future growth or cost savings.

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis.

Anand Chokkavelu doesn't own shares in any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.