Screen for Quality Stocks :
1- Revenue growth > 5%:
– In the long term, revenue growth is the main driver for stock market returns.
– Why? Because without top-line growth, a company can never grow its free cash flow per share at an attractive rate in the long term.
2- Earnings growth > 7%:
– In the end, you want most sales to be translated into earnings.
– Why? Because in the long-term stock prices always follow the underlying performance of the company.
– You can calculate your return as an investor as follows:
Return = Earnings per share growth + Shareholder yield (Dividend yield + Buyback yield) +/- Multiple Expansion (Contraction)
– If you don’t overpay for a company that can grow its earnings per share at attractive rates, you’ll do very well.
– “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
3- FCF / earnings > 80%:
– Companies that translate most earnings into free cash flow perform significantly better than companies which don’t.
4- ROIC > 15%:
– For quality investors, Return on Invested Capital (ROIC) is one of the most important financial metrics.
– It shows you how efficiently management is allocating capital.
– Furthermore, a high and stable ROIC is a great way to look at a company’s competitive advantage.
5- Net debt / FCFF < 5:
– You want to invest in companies which are in good financial shape.
– A healthy balance sheet gives a company flexibility and protects them against unforeseen circumstances.
– That’s why you would prefer to own companies which are able to pay down all their debt in at least 5 years.
6- Debt/equity < 80%:
– Too much debt and leverage is never good.
– If you’re smart you don’t need it and if you’re dumb you shouldn’t use it.
