Given widespread disruption and uncertainty in the stock market, it is more important than ever to identify high quality stocks for your portfolio. This means safe, profitable companies with strong balance sheets.
When it comes to investing, it pays to buy and hold the best quality companies possible. What makes these stocks so appealing is their ability to resist competitive threats and generate breathtaking profits. They compound investment returns at consistently above-average rates over the long term.
What makes them different is that they've got what billionaire investor Warren Buffett, calls economic moats.
Here's a quick guide to what makes these stocks stand out - using Dip (TYO:2379) as an example...
Has Dip (TYO:2379) got a moat?
When it comes to searching for companies with moats, some of the biggest clues actually lie in their financial statements. By looking at a small number of important ratios you can get an idea about the competitive strength and profit power in a business.
Here's what they are and why they are important - and how Dip stacks up against them:
- High rates of Free Cash Flow - the measure of a thriving company.
- A high ratio of free cash flow to sales can be a very positive sign. For Dip, the figure is an impressive 25.1%.
- High Return on Capital Employed - the measure of a company growing efficiently and profitably.
- A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Dip, the figure is an eye-catching 53.4%.
- High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- Dip has a 5-year average ROE of 43.6%.
- High Operating Margins (compared to peers) - the measure of a company with pricing power
- Dip has a 5-year average operating margin of 28.8%.
Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But it's important to do your own research and dig into the numbers yourself...
To find out more you might want to take a look at the TYO:2379 StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.
To find more stocks with moat-like characteristics, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Moats - which gives you everything you need. So why not come and take a look?