As investors, we always want our investments to generate a healthy return. However, investors often forget that returns stem from two, not one, extremely important factors:

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

This idea of price versus returns provides the bedrock for the school of investing known as value investing. In this series, I'll examine a specific business from both a quality and pricing standpoint. Hopefully, in doing so, we can get a better sense of its potential as an investment right now.

Where should we start to find value?
As we all know, the quality of businesses vary widely. A company that has the ability to grow its bottom line faster (or much faster) than the market, especially with any consistency, gives its owner greater value than a stagnant or declining business (duh!). However, many investors also fail to understand that any business becomes a buy at a low enough price. Figuring out this price-to-value equation drives all intelligent investment research.

In order to do so today, I selected several metrics that will evaluate returns, profitability, growth and leverage. These make for some of the most important aspects to consider when researching a potential investment.

  • Return on equity divides net income by shareholder's equity, highlighting the return 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. Generally speaking though, the lower the better for this figure. I chose to use five-year averages to help smooth away one-year irregularities that can easily distort regular business results.  

Keeping that in mind, let's take a look at PotashCorp (NYSE: POT) 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






CF Industries (NYSE: CF)





Intrepid Potash (NYSE: IPI)





Mosaic Co. (NYSE: MOS)





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

These figures really demonstrate the tailwinds these companies have benefited from over the past several years. Seriously benefiting from the boom in global demand for commodities, these companies exploited their strong positions, much to their benefit. Each company shows strong, if not eye-popping, performance, growth, all while remaining conservatively leveraged. If required to nit-pick, I'll separate Mosaic Co. from the others. Its lower ROE and margins make it a less desirable candidate than the rest, although even Mosaic's figures don't too bad. Looking at these figures alone, each company looks pretty attractive.

How cheap does Corning look?
To look at pricing, I chose to look at two important multiples, price to earnings and enterprise value to free cash flow. Similar to a P/E ratio, 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 this performance against the price we'll need to pay to get our hands on some of the company's stock.


Enterprise Value / FCF

P / LTM Diluted EPS Before Extra Items

PotashCorp 48.64 22.54
CF Industries 11.45 15.40
Intrepid Potash 61.04 36.26
Mosaic 63.40 13.60

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

As one should expect, investors wanting to pick up shares in any of these four companies will need to pay fairly steep premiums. Potash, despite having the strongest current ROE and margins, sits in the middle of the pack in terms of pricing. CF industries looks like the best potential value play in the group commanding disproportionately low multiples given its strong past performance. Carrying extremely high multiples on both the P/E and EV/FCF front, Intrepid Potash costs by far the most. However, I understand how investors choose to pay up for the +100% ROE and +90% growth. Mosaic Co. looks cheap from a P/E standpoint. Relatively high capital expenditures caused its EV/FCF figure to be the highest of the group.

Ultimately with these companies, you pay for what you get. While looking extremely profitable and enjoying spectacular growth, they'll also require you to pay a substantial premium for them. Some investors thrive in this kind of investing environment. I don't. Especially with recent weakness appearing in parts of the commodities market, I think I'll look to invest my hard-earned capital elsewhere.

While Potash stock doesn't look like a stock for your portfolio right now, the search doesn'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 piques your interest, further examining a company's quality of earnings, management track record, or analyst estimates all make for great ways to further your search. You can also stop by The Motley Fool's CAPS page where our users come to share their ideas and chat about their favorite stocks or click HERE to add them to My Watchlist.