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 Skyworks Solutions Inc (NSQ:SWKS), which is active in the Semiconductors & Semiconductor Equipment industry, as an example...
Has Skyworks Solutions Inc (NSQ:SWKS) 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 Skyworks Solutions Inc 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 Skyworks Solutions Inc, the figure is an impressive 29.1%.
- 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 Skyworks Solutions Inc, the figure is an eye-catching 28.6%.
- High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- Skyworks Solutions Inc has a 5-year average ROE of 26.7%.
- High Operating Margins (compared to peers) - the measure of a company with pricing power
- Skyworks Solutions Inc has a 5-year average operating margin of 32.4%.
Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. By analysing some key medium-term profitability and efficiency metrics, it's possible to start tracking them down. On this basis, it certainly appears that Skyworks Solutions Inc has some of the financial traits of an economic moat.
To find out more you might want to take a look at the NSQ:SWKS 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 like Skyworks Solutions Inc, 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 of the FTSE 350 - which gives you everything you need. So why not come and take a look?