Warren Buffett makes it sound so easy: find high-quality companies, wait for a good price to buy, and then hold them forever. Some of these high-quality companies are famous and rarely offer good entry points for investors.
Given widespread disruption and uncertainty in the stock market, it is more important than ever to identify high quality stocks, like those that Buffett looks for. This means buying safe, profitable companies with strong balance sheets when they are at bargain prices.
Some companies, though, are less well-known and have the same ability to resist competitive threats and generate breathtaking profits year after year. These economic moats, which allow the company to compound returns at above-average rates over the long term, might not be priced into the share price.
Let's take Metals & Mining company Polyus Pao (LON:PLZB) as an example.
The telltale signs of an economic moat
There are several ways that companies can build economic moats. For example, they might have:
- Intangible Assets - Such as brands, patents or regulatory approvals
- Switching Costs - It might be too costly or complicated for customers to leave
- Network Effects - When customers become part of a product
- Cost Advantages - Gained through superior processes and unique locations and assets
- Great Scale - Comprised of large infrastructure and distribution networks
So, does Polyus Pao (LON:PLZB) have a moat?
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 how Polyus Pao 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 Polyus Pao, the figure is an impressive 35.0%.
- 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 Polyus Pao, the figure is an eye-catching 26.7%.
- High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- Polyus Pao has a 5-year average ROE of 1,880%.
- High Operating Margins (compared to peers) - the measure of a company with pricing power
- Polyus Pao has a 5-year average operating margin of 54.0%.
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 Polyus Pao has some of the financial traits of an economic moat.
To find out more you might want to take a look at the LON:PLZB 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.
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