There are many ways to value a company. Price to earnings. Price to cash flow. Liquidation value. Price per eyeballs on website. 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? They're all limited and reliant on assumptions. No single metric 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 useful metrics out there.

What is it? Enterprise value over unlevered free cash flow.                                     

Enterprise value is market capitalization (share price times shares outstanding) plus total debt and minority interests, minus cash. Unlevered cash flow is free cash flow with interest paid on outstanding debt added back in.

The ratio of these two statistics provides a valuation metric that takes into consideration all providers of capital -- both stockholders and bondholders.

But you invest in common stock, so why should you care about bondholders? Ask Lehman Brothers investors why. When a company earns money, it has to take care of bondholders before you, the common shareholder, get a dime. Focusing solely on profits in relation to equity can be dangerously misleading.

Enterprise value 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. If you owned the entire business, this is the metric you'd naturally gravitate toward.

Using this metric, here are five companies I found that look attractive.


Enterprise Value/ Unlevered FCF

5-Year Average

CAPS Rating 
(out of 5)

Microsoft (Nasdaq: MSFT)








UnitedHealth (NYSE: UNH)




Verizon (NYSE: VZ)




Apple (Nasdaq: AAPL)




Source: Capital IQ, a divisions of Standard & Poor's.

Let's say a few words about these companies.

A couple numbers to think about: The S&P 500 currently trades at around 14 times this year's earnings. Microsoft trades at 10 times this year's earnings.

Investors are, therefore, pricing Microsoft as a decidedly subpar company. But is it? Hardly. Earnings per share have more than tripled over the past eight years -- a 16.5% growth rate -- and are expected to compound by another 10% per year for the next five years. This is a world-class company trading at a valuation few companies with half the merit sell for. Take advantage of that.

Last week, Berkshire Hathaway (NYSE: BRK-B) vice-chairman Charlie Munger made a few comments about Berkshire's wholly owned railroad, Burlington Northern. "We love our railroad," he said. "There are now 80% fewer employees and it's safer, more efficient, profitable -- a very efficient place."

Those efficiency gains have been industrywide. Railroads have blossomed over the past decade as rising diesel prices increase competitiveness with trucks. You can see that efficiency in a company like CSX, which has increased earnings per share by over 25% per annum over the past ten years. Part of this gain has come from management's capital allocation, with shares outstanding shrinking nearly 15% over the past five years. Should the economy continue to improve and commodity prices continue to rise -- both strong likelihoods -- these efficiencies will continue to payoff handsomely for the rails.

Two things happen over the past few weeks: The House symbolically voted to repeal President Obama's health-care reform legislation, and a Florida judge found the bill unconstitutional.

Odds are the bill will make its way to the Supreme Court, where its constitutionality will ultimately be decided. There's a chance the entire bill could be struck down. Leaving aside social consequences, this could be welcomed news for insurers. The original health-care law wasn't particularly onerous to insurers to begin with -- a struck down bill would be less so. The fog that's constrained health insurers for the past three years is beginning to lift, and companies like UnitedHealth could start seeing value unlocked for shareholders.

If you're like me, you don't think of Verizon and wonder how much it'll make from the iPhone, or how many AT&T (NYSE: T) customers it'll be able to steal. If you're like me, the thought process for Verizon goes like this: Good brand, good 5.4% dividend yield, good chance that dividend is safe, good enough for me. Don't own Verizon stock thinking you'll make a fortune as earnings explode. You won't. Own it to accumulate dividends -- rinse and repeat over as many years as possible.

Apple is one of the most successful stocks of the past five years, increasing some 380%. You'd think this would repel the hardcore value investors. Turns out that's not the case. They've been flocking to it.

Why? Put simply, the success of Apple's earnings is growing faster than its share price. Shares trade at less than 15 times this year's earnings. The company generated about $20 billion in free cash flow last year, which creates a respectable yield over its $300 billion market cap -- especially when you consider how fast that cash flow is growing.

Got any of your own? Share 'em in the comment section below.