The Big Five Numbers

There are five numbers that we have to look at to determine whether a business has a Moat.  Moat, of course, is some sort of protection by which a business automatically wards off competitors.

 

Protection comes in a lot of flavors.  Some bad boys protect their urban businesses with tech nines, nahmean.  But we don’ be investin’ dere, bro, nahmean?  We gonna move up to a better class of management that does their fighting with their brains, not their bullets.  It’s a lot safer and has a much more consistent success rate.

 

So we want some sort of Brand (when you want a Coke, a Pepsi just won’t do), Secret (patents and trade secrets), Switching Cost (too much hassle & expense to switch from Windows to a Macintosh), Toll Bridge (can’t advertise to all of Washington, D.C. without buying ad space in the Post), or Low Price Moat (Walmart).

 

Any of these offer protection without a lot of fighting.  No tech nines. Just an occasional lawyer. The Big Five numbers are a clue that there is a big Moat in place.  And if the Big Five are bad, ain’t no moat, bro.  You want to defend that castle you better count your ammo, nahmean?

 

The Big Five are just:

  1. Return on Invested Capital (ROIC); and the

    growth rates for

  2. EQUITY

  3. EPS

  4. SALES

  5. FREE CASH

 

We want to see all of these at 10% or better and not dropping.

 

Of these ROIC (you can also find it here on MSN) and Equity growth rate are the most important.

 

ROIC tells us that the CEO is handling the most important thing a CEO can do – wisely investing the surplus from profits.

If ROIC is below 10% or is dropping, run away.  It’s a sign the CEO is more interested in building an empire than giving the owners a great return on their investment.

Equity is the surplus from profits. 

We love to see steady equity growth, especially if the business is not giving back some of the equity to us owners (thats called a dividend).  We love a business that can use all that surplus to grow and it keeps the ROIC high.  That, my friends, is an awesome business. (More on how to calculate this growth below.)

 

And then we want to see EPS and SALES and FREE CASH growing at around the same rate as EQUITY.  And we want to see them linear and consistent.  By that I mean they go straight up, not bouncing all over the place, and the growth rate is consistent across the years.

 

I usually look at 10 years, 5 years, 3 years and 1 year.  The idea is to see first if they are high enough long term and then if they are improving or falling.

We want 10% or better and holding steady or improving.  If you are using a pro toolset like Success, most of this is done for you with the Trend tool. But you can do it in your head with a little practice.

 

Remember the Rule of 72 post?  I use the Rule of 72 to do these in my head all the time.  For example, go to MSN.com Money, select a stock, click on Financial Results, Key Ratios, Ten Year Summary and you’ll see a column for ‘Book Value /Share.”

 

That’s EQUITY broken into per share pieces. Here’s a picture of Whole Foods: (click on it to see a larger view)

Wfmi

 

 

 

 

Using the Rule of 72 I start with the oldest number in the column: $3.82.  That’s about $4.  So I double 4 once to 8.  Then double it again to 16.  That’s pretty close to the highest number, $15.84, so I stop there.  Two doubles in how many years?  96-97 is one year.  And so on. I get 8 years.  2 doubles in 8 years means one double in 4 years.  4 into 72 is 18.

 

So the equity growth rate at WFMI is 18% for the last 8 years.

 

How about the last 5?  A bit better.  Call it 20%.  And 3? About 24%.

 

And last year? Well, that’s when it’s nice to have an automatic tool.  But you can do an Excel calculation if you want that last number.  I did it.  Here it is:

Wfmi_excel

 

 

The one year bvps growth rate is 23%.  Wow.  This is what we look for .  An accelerating growth rate above 10%.  Sweet. Go do that for all of the Growth Rate numbers, and if they’re all that consistent, you got moat.

 

Now go play.

Phil Town

 

About Phil Town – Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • Anthony

    Have you written a guide for finding the financials today in 2016? Following your book none of the sites seem to offer these figures, most don’t even show ROIC and certainly no where offers 10 years worth of data.

    • Brenton Pickett

      A time consuming way is to use EDGAR. Morningstar offers free 10-years as well.

  • Shelby

    hello,
    new to rule#1 investing. can anyone help?

  • Shelby

    Hi,
    I’m new to rule #1 investing and I’m trying to calculate the big five numbers for Altera Corp. (ALTR) and I’m have doubts that my calculations are correct. I’m wondering if someone could help me run through the numbers to see if I’m doing them right.

  • Brad,
    You won’t find 10 year numbers on MSN.. Not many free sites have that. Investools does,, Are you looking for one in particular. I have an investools account and may be able to help you out..
    Take Care.
    Dean O

  • Brad Laramie

    I’m having trouble findinig the 10 year Free Cash Flow numbers on MSN, to no avail. Any recommendations?

  • Joanne

    Phil:
    I just started using your book. It’s excellent. I am charting raw data on GRMN and using your Excel formulas for calculating growth rates.
    My figures don’t match the company’s (GRMN)reports on msnmoney.com. Would you please answer some questions?
    Using your formulas and your online calulator for GRMN, my Sales Growth Rate for GRMN is 38.6% for 10 yrs., 53.5% for 5 yrs. and 79.3% for 1 yr. However, MSN’s Key Ratios/Growth Rates is reporting 46.88% for 5 yrs. and 22.80% for 1 yr. What am I doing wrong?
    Also, for equity raw data, do I use the book value/share or Total Equity as shown on GRMN’S balance sheet on msnmoney.com?
    Are you having any seminars in Fort Lauderdale, Florida in the near future?
    Thank you,
    Joanne

  • j.b.

    pkjude,
    5 year data is on MSN. 10 year, try Morningstar.

  • pkjude@yahoo.com

    I’ve gone on the “Free” financial websites looking for the Big 5 data and not able to find the 5 & 10 year data. Is there a trick or particular website that offers this info.

  • Rick M

    Just finished Rule #1 and am starting to crunch numbers. Looking for someone to exchange email info to check for correct calculations for paper trading. Anyone interested?

  • Mariah

    Ed,
    Check to see if WFMI’s stock has split. I think it has since the post.

  • Ed

    Why is the chart you have from MSN on WFMI so different from the present info. You bought Whole Foods at $90 in ’05 and it’s at $22 today.

  • mike

    @brian,
    you want to look at 10 years of historical growth if you can find it. if not, look at the oldest #s you can and take an average to get average historical growth (tossing out any aberrantly high or low #s).
    when picking a future growth rate, you use the lower of the growth rate you chose or the analysts’ average projected growth rate. analysts can differ, why not? they’re most likely using different valuation methods. some analysts may tend to be conservative, some more “hopeful”. that’s why phil tells us to be conservative and use the lowest growth rate we think is reasonable.
    @fmacken,
    investools does it but you have to pay.

  • FMacken

    Why cant I seem to find a stock screener which easily calculates these Big 5 numbers? Im new to investing and it seems like the terminology from one site to another is almost always a little different. It seems a little overwhelming.

  • Brian

    Phil,
    I can’t seem to get the 1 and sometimes 5 year growth rates given on msnmoney for sales and EPS to match up with what I get on your calculators. I enter 07 # as current 06 as initial and use 1.
    On finding the future EPS for sticker, what historical equity growth rate do we use? 10 or 5. MSN analysts give 5 so I used GRMN’s 5 year equity but the analysts differed by 16%. I would assume analysts estimates will never be more than 5% difference right?

  • PJ

    JVS,
    You’re using 8 years worth of numbers for the rate formula, but you’re talking about a 5-year average ROE… is it possible the company started growing a lot faster in the last 5 years?

  • Bruce,
    Check out this FAQ item explaining how to determine cash flow using MSN:
    http://www.philtown.com/frequently_asked_question/2007/05/where_do_i_go_t.html
    Jan,
    1. You can go to Financial Results > Statements > 10 Year to see the last 10 years’ of the company’s EPS. Use the most recent number for calculations. You can see that list here:
    http://moneycentral.msn.com/investor/invsub/results/statemnt.aspx?Symbol=GRMN&lstStatement=10YearSummary&stmtView=Ann
    You can also find the ttm EPS on the snapshot on Yahoo Finance:
    http://finance.yahoo.com/q?s=GRMN
    2. The Big Five numbers, historically, should have grown at least 10% over the last 10 years — and they should not be going down from year to year. What you’re looking at is for overall 10% growth in the past — and also you’re making sure that from year to year, growth is trending up (or staying the same) and not trending down. If a company had 20% growth 3 years ago, 15% 2 years ago, and 10% in the last year, that’s a downward trend and may be a signal to avoid the company. More on this here:
    http://www.philtown.com/phil_towns_blog/2005/10/the_big_five_na.html
    You will be using the RATE Excel formula, or Phil’s calculators, for these growth calculations.
    3. To determine a growth rate for your Future Stock Price projection, you need to first look at historical growth. Equity (BVPS) is the best predictor of future growth. Figure out the average Equity growth over the past 10 years, and then, for your Future Stock Price projection, use the LOWER of either the historical average Equity growth *OR* what the analysts predict for the company. For example, if you take an average of historical Equity growth and come up with 19%, but the analysts predict growth of 42%, go with your 19%.
    BVPS numbers can be found here on MSN:
    Key Ratios > 10 Year Summary:
    http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=US%3aGRMN
    P/E is a separate element. Find your growth rate first, as described above. Then determine your P/E — which will be either 2x your growth rate OR the average historical P/E from the last 10 years. As always, choose the lower (more conservative) number to use in your Future Stock Price projection.
    Historical P/E numbers can be found here (same place as BVPS):
    http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=US%3aGRMN
    Hope that helps!

  • Jan Sargent

    Dear Phil,
    I was SO excited when I bought the Rule # 1 book! I am now frustrated and discouraged. I teach school, so I am used to studying. I had a 3.7 GPA in college and made A’s in chemistry and precal. I have really tried to understand how to find the numbers to determine the sticker price. Because I have time this summer I have REALLY studied the book. (hours a day for two weeks). I was working on Garmin because you used it in the book and I came up with a sticker of $32.20 and a MOS of 16.10. I don’t believe these are correct because of my inability to find the correct numbers.
    Some questions:
    1. Are net income and EPS the same thing? (p.100 in book) When I look on Garmin’s growth chart I do not see EPS, but net income.
    2. The big five must be 10% a year. But 10% of what?
    3. You said to determine the P/E growth rate, but that equity was more important. Which do I use when I want to sticker price?
    I am trying to run the numbers on Garmin. I can’t locate future EPS or future P/E. If you have time, will you please do this for me and email. Also, if you could explain again how to find the future P/E and future EPS, I would really appreciate it.
    I want so badly to become proficient at this, but at this point, I am so frustrated. Am I over analyzing?
    Thank you so much for your concern for those of us who have never been exposed to stock market jargon or abbreviations.
    Sincerely,
    – Jan

  • Nguyen Anh Tuan

    Dear Mr Phil Town
    You may be surprised to get this comment. My name is Tuan, male, 32 years old, from Ho Chi Minh City, Viet Nam. I reading your book(Vietnamese Version) and find it so meaningful to me. I love the way you explain how to invest. Even though Applying That way to invest in Viet Nam Stock Market is not easy, I am trying my best to learning investing with your book.
    I am so happy to know you.

  • Bruce Nakasone

    I have been using the Garmin numbers to determine where the big five numbers come from. I can do all of them but the cash. The numbers in the book do not match anything that I can see on the cash flow statement.
    Can I get a better explanation of where the numbers come from on the three financial reports. I am using MSN money for the reports.

  • JSVSoccermom

    Hi Phil – me again. I figured out the formula thing by scanning old posts – thanks. Here is my next question. How can Equity growth be less than 2% if the site tells me that the Return on Equity is 24% for five years average? BVPS started at 4.45 in 99 and is now 5.25 – growth rate 1.66% using that handy dandy formula you provided. Do I ditch this company? They are paying out substanial dividends 30.36 million last year but it makes me nervous….HELP>
    J

  • Judy

    I recently attended an Investools seminar and am currently a student of Investools advanced courses. I want to develop a strong Rule #1 investing foundation using the tools and information available on the Investools website to quickly find wonderful Rule #1 businesses to invest in. Is there a way to use the wealth of information available on Investools to quickly do much of the 4M analysis? Thank you sincerely for any help you can provide. By the way, I just completed your great Rule #1 book. I really appreciate the clear straightforward language in the book that demystifies the process for a novice investor like myself. Thank you so much for helping the “little guys and gals”.

  • jen b.

    darryl,
    i think what phil has said in the past is that whole equity numbers are better, but bvps is close enough (and easier because it’s what msn offers, going 10 yrs back, so you don’t have to dig it up).

  • Ralph Giangregorio

    I e-mailed you before about my difficulty in applying the Rule #1 principles.
    Is there any supplementary assistance offered to people who are in my situation?

  • Sandesh,
    ROIC is most critical but some businesses have so much capital tied up in equipment that their ROIC is below 10%. See BNI for example.
    The answer lies in knowing the industry. If the capital items have to be replaced quite a lot and that is why the ROIC is low, then that is not a good business to invest in because the profits don’t make it into equity.
    So one way to check this out is to see if BVPS is rising solidly above the 10% minimum and ROE is excellent.
    Also check Cash, Sales and EPS to make sure all of them are growing together. If so, then this could be okay.

  • Darryl Beplay

    When calculating equity, which number is best to use; BVPS or the larger equity number from the 10yr Balance sheet? I tried both and there is a couple percentage point difference. Thanks.

  • Sandesh Sapre

    Hi,
    How about companies that don’t satisfy ROIC criteria but all other growth rates are extremely desirable (greater than 20% for 9 years)
    I know ROIC is the most critical, So any suggestions ?

  • chandra

    zmbtech,
    Read this FAQ post:
    http://www.philtown.com/frequently_asked_question/2007/05/where_do_i_go_t.html
    If you’re looking at a financial report and a number has a minus sign in front of it, that simply means that number is being deducted from the number above it. It is not in and of itself a negative number.

  • zmbtech

    how do I calculate free cash flow? do I includes the minus sign in my excel formulas?

  • Eric

    04_14_2008 – Not sure who will see this. Finished book, loved it, need to change life. Did a practice run on Home Depot to test myself.
    How can I double check my findings?
    ROIC – 14%
    Sales Growth – 11%
    Cashflow – -3%
    EPS – 14%
    Equity – 11.5%
    Sticker – $32.83
    MOS – $16.40
    Selling today – $27.90 – Not yet…
    Help?

  • Bill,
    Phil just posted on Free Cash Flow today.

  • Bill

    I’ve been looking at MSN Money to find the raw numbers for the four growth rates. Going to “Statements” under “Financial Results” I click on the “10 Year Summary” and find the numbers for “Sales” and “EPS”. Correct me if I’m wrong, but I subtract “Current Liabilities” from “Current Assets” to get the raw numbers for “Equity”. The only other thing remaining for the four growth rates is “Cash” or “Free Cash Flow”. I’m looking for some help or confirmation on figuring the raw numbers for that.
    Approach #1: If Earnings is the same thing as “Free Cash Flow”, then I can take the EPS and multiply it by the “Shares Outstanding” to get Cash.
    Approach #2: If Earnings is the same thing as “Free Cash Flow” and if “EBIT” is “Earnings Before Interest and Taxes” and if “Total Net Income” is EBIT after Interest and Taxes, then my raw numbers for “Free Cash Flow” is in the column of “Total Net Income”.
    When I multiply EPS by “Shares Outstanding” the answers are quite close to “Total Net Income”.

  • Mell

    Thanks j.b. for your reply.
    So that would mean we can add on the growth rates to derive a long term performance of the company if we do have the numbers. But we need at least 10 years of data to be able to gauge the durability and predictability of the company.

  • mikflyd

    Mr. Phil, I would like to thank you to opening my eyes to the stock market, it seems i have been over estimating how complicated it was. After reading your book and i also have your book on my ipod, so that i can keep it sinking in, i now see what is possible with a little hard work. im in the learning stages of this and im excited to get to the point that im paper trading. I have come back to the part where you calculate the big 5 so that i can get this last piece of the puzzle , every thing else i have pretty clear. Just getting use to the formula’s and finding the data seems to be the biggest challenge. I was wondering if you can email me back and let me know on page 101 1st paragraph last line where you say on (grmn)that you start by having the raw numbers handy, i really need your help on where i get those numbers from to do the calculations, with the rule of 72? thanks again for opening my eyes to the possiblities.
    thanks,
    Michael

  • j.b.

    Mell,
    You want to know how the company has done for the last 10 years, not the first ten (though it doesn’t hurt to be aware of the overall big picture). So go from Year 2 to Year 11.

  • Mell

    When doing the growth rates for the Big 5 numbers, we would like to see at least 10 years of data. What happened if another year has passed, do we use a “11 year” growth rates, or simply discard the oldest and include the latest data, to maintain a 10 year growth? They can tell a very different story.
    Thanks

  • Robert Griggs

    In calculating the ROIC of 3 companies that I am starting to look at and practice with, the 1yr and 5yr have great numbers, one has ( 34.9 and 38.6) but the 10yr is only .41. This doesn’t seem correct. The ticker of one is FMD. Am I inputing the correct figures. All three of the co’s that I am looking at have decimal point ROIC numbers.

  • Krista

    Hi-I am new to Rule #1 and I am trying to figure out the annual ROIC for several companies and cannot quite locate it. I see the data necessary to use the calculator for the last 5 years on MSN Money but no data further back than that. How am I to find the ROIC (or atleast the NOPAT, Equity & Debt to put in the rulenumberone.com calculator) for years 1997-2001? THANKS!!!

  • robert barbeau

    hey phil- reading your book -best out there on how to valuate companies properly didn’t have a clue before -thanks! Robert B.

  • gary westermann

    I am just getting started. Is there a form set up somewhere for researching wonderful companies? do I have to set up an excel spreadsheet?

  • Daniel

    I am reading your book. I am sure the tips I am finding will definitely apply to all the investments I have right now. Can i ask you a question?
    What do u do in your free time? What are doing when you don’t write books? Do your family think of you as a genius? Do you travel around the world? Have u learned a new language? Does investing take all of your time?

  • nutrader

    In determining 10 year numbers for ROIC and using Phil’s calculators…which numbers do I enter from a companies statements.

  • Richard Lanning.

    do you think i could turn 1500 into 1million?

  • ramil rivera

    Hey Phil.
    Great book!!
    I am totally new to this arena and slowly digesting the material. In the chapter where you define the Big 5 numbers and instruct on where to get them, I have a question about obtaining the ‘free cash flow’ numbers. As a beginner I am apt to follow your instructions as detailed as possible with the understanding that the websites that you mention to use may have changed their format. You note that to obtain the cash flow numbers via MSN Money, I navigate to the Cash Flow statement and scroll down to the very bottom where the numbers will be indicated by “free cash flow.” When I do this I get (again probably as result of format change since you first wrote your book) two lines at the very bottom one of them being “net cash – ending balance”. I followed your example when explaining about debt and ‘found’ the numbers for ‘long term debt’ but am having some difficulties in finding the free cash flow number that you used in the example for the same year. Can you help? I want to be sure that I am looking in the right areas and obtaining the correct numbers just as you have used as examples throughout your book.

  • WH

    Hi, Phil.
    I recently picked up your great book and have already learned quite a bit out of it. I fully intend to keep it with me and continue learning until the ideas presented in the book become so ingrained in me that I can never get rid of them even if I wanted to.
    Now I have a few questions regarding the BIG FIVE numbers. First, the 10 past-year EPS numbers listed MSN are clearly basic EPS. But doesn’t it make more sense to use the diluted EPS numbers? Second, according to my own experience in one stock, the book value per share (or equity as you call it) number is something easily subject to manipulation. Then should we really attach so much importance to this equity growth rate (if I remember correctly, it’s your second most important number in the four growth rates plus ROIC)? My final question is about ROIC. Since MSN only gives a one-year ROIC and a five-year average ROIC, I want to do my own math to get the ROIC for each of the past five or even ten years. The formula given in your book for ROIC is
    ROIC = NOPAT / (equity + long term debt)
    Suppose I already get the ROIC for each of the past five years. Then how can I calculate the ROIC (5-year average) from those five individual ROICs? Is it the simple sum divided by the number of years, which is 5 here? I used this method to calculate my own five-year average ROIC. Unfortunately it doesn’t match the corresponding number given by MSN. So I figured there must be something wrong here. Please point it out to me if possible.
    Keep up your great work.

  • danny

    How do I find the future eps on msn money and I can not figure out where I can find the history growth rate? I have listened to thebook twice took some notes and now trying to stick numbers in the calculations but can not seem to find where they come from, thank you

  • cheah han chow

    To Phil Town,
    I am your reader and would like to follow your way of investing.But, can I just use the past five years for the Big Five Numbers since I find the problem to find the past 10 years Big Five Numbers?
    From
    Cheah Han Chow

  • MJ

    ROE is different. You can use the 5 years of ROIC on MSN, but for older numbers you probably have to calcualte ROIC yourself by following hte instructions in Phil’s new calculator.

  • You say above that ROIC measures if the CEO is wisely investing the surplus from profits, and that equity is the surplus of profits. What is more important to measure ROIC then, return on capital or return on equity? On MSN money they list both. They list the return on equity % for each year for the last ten, but only list the return on capital for the last year and a 5 year avg. If I need to know the return on capital, where do I get the last 10 years?

  • J.B.

    Just make sure you use numbers that are posted the same month from year to year, so that you’re getting an accurate idea of a full year’s growth (versus like 9 months’ growth or 6 months’).

  • Davene

    When trying to find out the growth rates of the Big Five, do I also use the current year number even though it’s the middle of the year or do I just stick to the ten-year summaries, etc?

  • Danielle

    Yeah, I nahmean.