Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples
  • The consistency of past earnings and cash flow
  • How much growth we can expect

Let's see what those numbers can tell us about how expensive or cheap F5 Networks (Nasdaq: FFIV) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

F5 has a P/E ratio of 77.1 and an EV/FCF ratio of 37.3 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, F5 has a P/E ratio of 126.7 and a five-year EV/FCF ratio of 61.4.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

F5 is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

F5 Networks

77.1

37.3

126.7

61.4

Cisco Systems (Nasdaq: CSCO)

14.9

9.8

16.5

10.2

Citrix Systems (Nasdaq: CTXS)

47.2

21.7

63.4

33.8

Juniper Networks (NYSE: JNPR)

44.9

34.7

194.4

29.2

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how F5's valuation rates on both an absolute and relative basis. Next, let's examine...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, F5's net income margin has ranged from 11.4% to 17.1%. In that same time frame, unlevered free cash flow margin has ranged from 25.5% to 34.1%.

How do those figures compare with those of the company's peers? See for yourself:

Ffivmarginranges

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the past five years, F5 has tallied up five years of positive earnings and five years of positive free cash flow.

Next, let's figure out...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, F5 has put up past EPS growth rates of 25%. Meanwhile, Wall Street's analysts expect future growth rates of 24%.

Here's how F5 compares to its peers for trailing five-year growth:

Ffivtrailing

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Ffiv

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples shares of F5 are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 77.1 P/E ratio, and we see that F5 appears to be a classic growth stock at a growth stock price, but this is just a start. If you find F5's numbers or story compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you. For a good start, check out Anders Bylund's take on the company's earnings yesterday. The company fell more than 20%, but was the news that bad?

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: "34 Expert Analysts Uncover Outstanding Dividend Plays."

Anand Chokkavelu doesn't own shares in any company mentioned. Juniper Networks is a Motley Fool Big Short short-sale selection. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Alpha has opened a short position on Juniper Networks. Motley Fool Alpha owns shares of Cisco Systems. 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.