Creating Value 10 Canadian companies creating value with their capital
What are we looking for?
Companies that deploy their capital efficiently.
We believe that companies that can invest in opportunities offering significant return while minimizing risk are less impacted by short-term market volatility than others, and they often possess a sustainable competitive advantage that allows them to deliver value to shareholders.
So, we will use the economic value-added (EVA) framework to find companies with favourable economics.
The screen
We screened Canadian stocks focusing on the following criteria:
- Market capitalization greater than $5-billion
- EVA on capital higher than 10 per cent. This is a measure of value creation calculated by using the EVA for the most recent 12 months divided by the company’s invested capital
- Economic performance index (EPI) higher than 2. The EPI is return on capital divided by the cost of capital, and it is a measure of profitability adjusted for risk. An EPI higher than 2 implies robust value creation
For informational purposes, we have also included return on capital, price-to-earnings ratio, dividend yield and one-year price return. Please note that some ratios may be shown as of the end of the previous quarter.
More about Inovestor
Inovestor for Advisors is a fundamental-analysis research platform specializing in the EVA approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios and easily communicate investment decisions with clients through client-friendly reports.
What we found
10 companies that spend their capital efficiently
| TICKER | NAME | PRICE | MKT VALUE ($ MIL.) | EVA/CAP (%) | EPI | ROC (%) | P/E |
| DOL-T | Dollarama Inc. | 77.25 | 22190 | 24.5 | 5.1 | 30.8 | 29.7 |
| DOO-T | BRP, Inc. | 109.28 | 8605 | 21.6 | 3.5 | 31.7 | 12.4 |
| CSU-T | Constellation Software Inc. | 2289.84 | 48525 | 17.2 | 4.2 | 22.2 | 78.4 |
| TOI-X | Topicus.com, Inc. | 89.86 | 7359 | 14.1 | 3.1 | 26.3 | 99.9 |
| WFG-T | West Fraser Timber Co. Ltd. | 100.77 | 8420 | 13.5 | 2.6 | 23.8 | 3.7 |
| NTR-T | Nutrien Ltd. | 104.86 | 53190 | 12.6 | 2.7 | 23.3 | 5.7 |
| IMO-T | Imperial Oil Limited | 69.46 | 40575 | 12.4 | 2.2 | 22.6 | 6.1 |
| TFII-T | TFI Intl Inc. | 167.88 | 14528 | 12.3 | 2.5 | 21.8 | 14.0 |
| RBA-T | Ritchie Bros. Auctioneers Inc. | 77.72 | 8618 | 10.9 | 2.6 | 14.1 | 20.7 |
| GIL-T | Gildan Activewear Inc. | 43.03 | 7733 | 10.6 | 2.5 | 20.8 | 11.2 |
Source: Inovestor
Dollarama Inc. DOL-T, a chain of discount stores, has a colossal EVA on capital of 24.5 per cent, indicating that the company generates significant value from its invested capital. The EPI of Dollarama is at 5.1, the highest on our list, which further strengthens the assertion of value creation. The company is commonly viewed as a sound recession play, since its sales tend to be resilient during recession. Dollarama’s P/E ratio of 29.6 is a moderate to high multiple, which could reflect its value creation potential and recession proof business model.
BRP Inc. DOO-T designs, manufactures and distributes power sports vehicles and marine products, and its share price rose 30.2 per cent over the past year, reflecting positive market sentiment toward the company’s performance despite the looming risk of a recession. BRP also achieved the highest return on capital of our list, at 30.2 per cent, prompting us to conclude that the company must have significantly beaten market expectations over the past year.
Constellation Software Inc. CSU-T, a conglomerate focused on vertical software businesses, is trading at just 4.8 per cent below its all-time high as of last Friday’s close, a performance that certainly surpasses most technology stocks. Also, with a market cap of $48.5-billion, it is the second largest company in our screen. However, it’s worth noting that sizable companies in non-cyclical industries that are also substantial value creators tend to come at a premium, and this is certainly true for Constellation, which has a lofty P/E ratio of 80.1.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.