As investors, we always want our investments to generate healthy returns. However, investors often forget that such returns stem from two extremely important factors:

  1. The business's ability to generate profits.
  2. The price you pay for one share of those profits.

This idea of price versus returns provides the foundation for the school of investing known as value investing. In today's edition of this series, I'll examine both the quality and the pricing of Chart Industries (Nasdaq: GTLS), in hopes of gaining a better sense of its potential as an investment right now.

Where should we start to find value?
As we all know, businesses' quality varies widely. A company that can grow its bottom line faster than the market, especially if it does so with any consistency, obviously gives its owner greater value than a stagnant or declining business. However, many investors also fail to understand that any business can become a buy at a low enough price. Figuring out this price-to-value equation drives all intelligent investment research.

For today's spotlighted stock, I selected several metrics to evaluate returns, profitability, growth, and leverage:

  • Return on equity divides net income by shareholder's equity, highlighting the return that a company generates for its equity base.
  • The EBIT (short for earnings before interest and taxes) margin provides a rough measurement of the percent of cash a company keeps from its operations. I prefer using EBIT to other measurements because it focuses more exclusively on the performance of a company's core business. Stripping out interest and taxes makes these figures less susceptible to dubious accounting distortions.
  • The EBIT growth rate demonstrates whether a company can expand its business.
  • Finally, the debt-to-equity ratio reveals how much leverage a company employs to fund its operations. Some companies have a track record of wisely managing high debt levels, but generally speaking, lower is better here. I chose five-year averages to help smooth away one-year irregularities that can easily distort regular business results.

With that in mind, let's look at Chart Industries and some of its closest peers:

Company Name

Return on Equity (5-year avg.)

EBIT Margin (5-year avg.)

EBIT Growth (5-year avg.)

Total Debt / Equity

Chart Industries

14.34%

13.70%

11.09%

41.09%

National Oilwell Varco (NYSE: NOV)

16.02%

19.73%

46.22%

4.36%

Nordson (Nasdaq: NDSN)

14.06%

17.68%

18.26%

19.61%

Dril-Quip (NYSE: DRQ)

18.09%

27.21%

34.47%

0.02%

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

Many of these companies generate similar if not overwhelming performances. Chart Industries seems like a decent but not astounding business. It generates a somewhat meager ROE with decent margins and healthy growth. It finances itself conservatively. Like I said, this looks good, but certainly not something to write home about.

National Oilwell Varco stands above its peers with its past growth. Even with that growth, it only generates fair returns and margins.

Nordson looks like another solid but unremarkable company. Similar to Chart Industries, it appears to manage its affairs well, but offers nothing truly exceptional.

Dril-Quip generates the best returns (still not amazing) and appears to maintain the best margins. It also demonstrates some impressive growth, all without requiring any leverage. In terms of purely evaluating the businesses, Dril-Quip certainly looks like the most impressive company out of the bunch to me.

How cheap does Chart Industries look?
To gauge pricing, I studied two important multiples: price to earnings, and enterprise value to
free cash flow. Similar to a P/E ratio, comparing enterprise value (essentially, debt, preferred stock, and equity holders combined, minus cash) to unlevered free cash flow conveys how expensive the entire company is versus the cash it can generate. This gives investors another measurement of cheapness when analyzing a stock. For both metrics, the lower the multiple, the better.

Let's check these companies' performance against the price we'd need to pay to get our hands on their shares:

Company

Enterprise Value / FCF

P / LTM Diluted EPS Before Extra Items

Chart Industries 66.14 52.07
National Oilwell Varco 20.45 17.46
Nordson 28.64 19.12
Dril-Quip 73.29 26.67

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

These companies all look expensive to me. No company here currently sells below 20 for both its P/E and EV/FCF figures, not exactly a measurement of rock bottom pricing itself. Especially considering the low-to-moderate qualities of the businesses here today, these stocks looks unattractively pricey from my perspective.

In evaluating this quality-to-price ratio, these companies all look like passes to me. I found Dril-Quip the most interesting, but even its shares seem expensive to me. These companies seem like the kind of firms you buy for multiples of 10 or lower, not 20 or greater as seen today. Given that, I think none of these companies look like they deserve a spot in your portfolio.

While Chart Industries looks like an unattractive stock for your portfolio right now, your search shouldn't end here. In order to really get to know a company, you need to keep digging. If any of the companies mentioned here today pique your interest, you can continue your research by examining their quality of earnings, management track record, and analyst estimates, among other metrics.

Need a little help? Stop by Motley Fool CAPS, where our users share ideas and chat about their favorite stocks, or click here to add the four stocks I've covered here to My Watchlist. Our new, free watchlist service will keep you up to date with Foolish coverage of any developments surrounding Chart Industries and its competitors.

Andrew Tonner owns no positions in any of the companies mentioned in this article. National Oilwell Varco is a Motley Fool Stock Advisor choice. 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.