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 Aetna (NYSE: AET) and some of its closest peers.


Return on Equity (5-year avg.)

EBIT Margin (5-year avg.)

EBIT Growth (5-year avg.)

Total Debt / Equity






Coventry Health Care (NYSE: CVH)





Express Scripts (Nasdaq: ESRX)





MedcoHealth Solutions (NYSE: MHS)





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

Aetna looks decent here. It generates solid ROE and EBIT margins and its conservative financing is a plus, but growth prospects appear unappealing.

Out of this peer group, Coventry appears the most well-rounded. It generates an average ROE with decent margins and acceptable growth. It also has the most conservative capital structure among the four companies here. While it won't overwhelm you, it does post respectable results for each metric used here.

Express Scripts generates far and away the best return on equity out of the field, driven largely by its growing business, though its weak margins makes me somewhat cautious. It also looks safely financed.

MedcoHealth looks clearly the most risky on paper with its high (but not astronomical) debt load. It generates an above average return on equity despite its low operating margin. Similar to Express Scripts, the company also has a strong growth element.

How cheap does Aetna 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




Coventry Health Care



Express Scripts



MedcoHealth Solutions



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

I don't see a ton of bargains here. Aetna looks cheap from an earnings standpoint but expensive in terms of cash flow. On the whole, Coventry looks like the best risk-reward situation. While it doesn't do anything amazingly well, it looks cheap enough to possibly deserve further investigation. Both ExpressScripts and MedcoHealth look too expensive to buy.

On the whole, I think only Coventry merits deeper analysis.

While Aetna's 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.