Yahoo Finance Here's why you should keep an eye on A2 Milk (ASX:A2M)'s medium term share price
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, I'm convinced it pays to buy and hold the best quality companies possible. These companies can compound investment returns at consistently above-average rates over the long term.
These stocks are different because they've got what billionaire investor Warren Buffett, calls economic moats.
In this article, I'm going to tell you what makes these stocks so special by using A2 Milk (ASX:A2M) as an example. A2 Milk is a balanced, large cap in the Food Processing industry.
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Has A2 Milk (ASX:A2M) 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 A2 Milk 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 A2 Milk, the figure is an impressive 22.4%.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 A2 Milk, the figure is an eye-catching 40.5%.High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- A2 Milk has a 5-year average ROE of 33.7%.High Operating Margins (compared to peers) - the measure of a company with pricing power
- A2 Milk has a 5-year average operating margin of 20.7%.
So it does seem as though A2 Milk might have some kind of economic moat. A quick look at A2 Milk's (ASX:A2M) StockReport page shows that the company has a Quality Rank of 98.
Next steps
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 A2 Milk has some of the financial traits of an economic moat.
To find out more you might want to take a look at the ASX:A2M 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 A2 Milk, 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?
