You may have noticed that many common products in your house made by personal and professional goods company Clorox (NYSE:CLX). You may also work at a business that utilizes the uniforms and professional cleaning services of Cintas (NASDAQ:CTAS).

However, when pursuing investment research ideas, it always pays to do your research to see if the companies are growing revenue, profitability, and free cash flow -- the lifeblood of any business and the catalyst for any superior long-term capital gains and dividends. Let's take a look under the proverbial hood of these two companies.

Names you know

Clorox operates under four business segments -- cleaning, household, lifestyle, and international. Under the cleaning segment, the company sells well-known brands such as Clorox, Pine-Sol, and Liquid-Plumr. Moreover, under the household segment, Clorox sells products such as Kingsford charcoal and Scoop Away cat litter. The company also sells products under the Burt's Bees brand, and food products such as KC Masterpiece under the lifestyles segment. 

Surprisingly, Clorox's long-term fundamentals are lackluster. Clorox's revenue and net income only expanded 35% and 4%, respectively, over the past 10 years. Free cash flow actually declined 20% during that time.  

Looking at Clorox's most recent balance sheet reveals a highly leveraged balance sheet. Its cash balance of $364 million equates to 687% of stockholder's equity. However, don't let that fool you. It's based on a highly deflated stockholder's equity balance of a minuscule $53 million due to the large amounts of long-term debt, which equates to an astounding 3,009% of stockholder's equity. 

Interest from long-term debt can choke out profitability and cash flow. Investors should always look for companies with long-term debt-to-equity ratios of 50% or less. On the upside, Clorox's operating income exceeded interest expense by nine times in the last quarter. The rule of thumb for safety resides at five times.

The company does pay a dividend. Looking to see how much of a company's free cash flow it paid out in dividends in a full year is the best way to gauge dividend sustainability. Clorox actually stands on solid ground on this front. Last year the company paid out 47% of its free cash flow in dividends. Currently, Clorox pays its shareholders $2.96 per share per year and yields 3.3%.

Clean uniforms and workplaces
Cintas rents and sells uniforms, provides cleaning services, sells safety-related merchandise such as first-aid and fire safety supplies, and provides document management services. Over the past 10 years Cintas has fared a bit better than Clorox. During that time the company increased its revenue, net income, and free cash flow 41%, 8%, and 30%, respectively. 

Cintas possesses an OK balance sheet with cash and long-term debt-to-equity clocking in at 16% and 58%, respectively, in the last quarter. Operating income exceeded interest expense by nine times during that time. 

Cintas pays a fairly sustainable dividend. Last year the company paid out 22% of its free cash flow in dividends. Currently, Cintas pays its shareholders $0.77 per share per year, which translates into an annual yield of 1.2%.

Looking ahead
While Clorox possesses a strong portfolio of brands and a solid dividend, its overleveraged balance sheet should give investors cause for concern. Better opportunities definitely lie elsewhere. As for Cintas, businesses will continue to want and need a clean commercial environment, employees professionally dressed for their jobs, and documents shredded and filed. Cintas' steady performance will continue as long as the economy holds up, and the company definitely deserves a second look.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.