Illinois Tool Works Inc. (ITW), Stanley Black & Decker, Inc. (SWK): Here’s A Fundamental Metric That You Should Monitor

In the case of Stanley Black & Decker, Inc. (NYSE:SWK) and Illinois Tool Works Inc. (NYSE:ITW), the lower payout ratio could be attributed to higher operating margins. The same is true for Neenah and International Paper, as Neenah has operating margins of 10% compared to IP’s 7.5%.

Also, like Stanley Black & Decker, Inc. (NYSE:SWK) and Illinois Tool, the cause for Neenah’s higher operating margin is due to better investments, as Neenah’s return on equity is nearly 22% versus 14% for IP. With that said, these facts could imply that a small and relatively unknown company, Neenah, is actually better than the industry powerhouse, International Paper, although valuations must also be measured.

In this case, both stocks trade at 0.77 times sales, but International Paper trades at 20 times earnings compared to Neenah’s 13 times earnings. Therefore, I consider Neenah to be the better investment opportunity.

Final Thoughts

Indirectly, this article also shows you the importance of a company’s return on equity, as a higher percentage implies a higher operating margin, which then leads to a lower payout ratio.

In my book, I thoroughly explain the importance of comparing companies to their competitor, as it allows you to identify certain strengths and weaknesses that may be invisible without the comparison. In this article, you now see why this practice is important, and now you can use it in future research.

Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works.

The article Here’s A Fundamental Metric That You Should Monitor originally appeared on Fool.com and is written by Brian Nichols.

Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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