Given widespread disruption and uncertainty in the economy, 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 K3 Capital (LON:K3C) as an example...
Has K3 Capital (LON:K3C) 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 K3 Capital 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 K3 Capital, the figure is an impressive 40.1%. - 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 K3 Capital, the figure is an eye-catching 86.7%. - High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
- K3 Capital has a 5-year average ROE of 89.8%. - High Operating Margins (compared to peers) - the measure of a company with pricing power
- K3 Capital has a 5-year average operating margin of 39.0%.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.