In my opinion, when I look for something to invest in, I gauge the safety of the investment as well as the possible return and then make a decision if the balance is there between the two.  I also look at two sides of an equity investment as the potential for growth (as defined by an increase in value) and the other side of yield (as in dividends or interest payments).

My dad used to talk to me about his #1 priority when investing in public companies and looking for a return was the price to earnings ratio or PE ratio.  In essence that number was a price multiple of the company’s earnings that a buyer would pay for the stock.  In dad’s view, anything over a 15 P/E ratio was overpriced and you had little chance for capital appreciation.  We do the same type of thing in the private funeral industry when we look at the price to EBITDA ratio.

In a “Growth” industry, that P/E or EBITDA ratio would be growing.  If we were excited about an industry (as happens many times in the technology sector) we would see investors move that ratio higher.  Looking at funeral service death care companies as of yesterday, according to statistics listed on E-Trade.com, we see that Service Corporation International has a P/E ratio of 15 and Carriage Services has a P/E ratio of almost 20.  That number alone indicates, that at that point in time, the stock buying universe sees more growth potential in Carriage Services than SCI.

The flip side of P/E ratio and something that can sometimes hinder faster growth – because you are paying stockholders rather than reinvesting those dollars in  the business – is dividend yield.   Public companies many times raise dividends as a faster way to increase the stock price than building through investment and P/E growth.  When companies, such as utilities, raise the dividends high enough, they virtually forego growth and use their profitable businesses as cash machines for shareholders with stock price increases through growth going out the window.

So, where are you with your individual funeral home?  Do you have a proper balance between investing in the business and taking cash out so that your business P/E or EBITDA can grow?  Or, are you taking tons of cash out of the business and living the high life?  There is no right of wrong answer to this question other than you have to look at your individual situation and ask yourself, “Is my funeral home still a growth business?”  If you are not in a “growth mode” then, in reality, you are in a decline mode because status quo never happens.

My opinion is that even though you are in the death care business, act like you are in the technology business and keep investing in the growth path.  Think about adding services, adding facilities, purchasing a competitor or neighbor when possible.  With the cash that your business generates make sure that you find a proper balance between rewarding yourself and re-investing in the business.  Doing that, and keeping the excitement and growth going, will eventually lead to a higher multiple of EBIDTA when you go looking for it.

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