A vital component of any investment philosophy is to purchase ‘quality’ companies. We feel quality companies deliver greater returns in a lower degree of risk than poor companies. The problem using the term ‘quality’ is defining what is an excellent company and just what it isn’t. Quality is really a subjective measure and just what may seem like quality to 1 individual is to not another. It’s also hard to measure and cost. Regrettably we can’t simply insert a line right into a company’s balance sheet known as ‘quality’ and fix a suitable amount.
Here are a few key indicators of quality companies:
1. History of steady development in earnings per share (EPS)
An excellent company ought to be growing its earnings with time. You should take a look at EPS as opposed to just profits because profits could be inflated by issuance of more equity and acquisitions. EPS is the greatest way of measuring real earnings growth.
2. History of steady development in dividends per share
There is nothing more transparent than dividends. The payment of the dividend proves that the company has money on hands and also the financial muscle to make a income to shareholders. Dividend growth is paramount to lengthy-term share cost performance
3. Strong balance sheet
It’s a simple, but little considered, proven fact that companies without any debt don’t go under. Some firms that have defensive businesses and cash flows can tolerate greater amounts of debt, but look for reliable finances, which getting a manageable degree of debts are a vital attribute.
4. Strong market position and prices power
For share investors, levels of competition are the enemy. Prefer firms that possess the mettle on their own competition either simply because they come with an unrivalled brand, distribution network or product, or search for firms that face low level of competition, like many utilities. Excessive competition puts pressure on margins and undermines profitability. Search for firms that have high amounts of prices power. Getting the opportunity to increase prices is suggestive of a company having a strong market position. Utilities sometimes have this prices power controlled by regulation.
5. Inherently defensive business
Companies with businesses which are defensive are usually greater quality companies. Defensive businesses are individuals that offer products or services that there’s a dependable and growing demand. Firms that provide these kinds of ‘core’ services include, banks, utilities, oil companies, healthcare companies, and producers of food and private hygiene products.
6. Strong management
The knowledge, vision, leadership skills and integrity of management may have a huge effect on the performance of the company.
Cam Watson may be the Chief Investment Officer for ABN AMRO Craigs, which is among New Zealand’s largest independent investment firms.