For investors aiming to assemble a portfolio of outstanding companies for the long term, the principles of quality investing offer a persuasive framework. This philosophy centers on finding businesses with lasting competitive strengths, sound financial condition, and a confirmed capability to produce high returns on capital. The "Caviar Cruise" stock screen, based on this approach, uses a set of numerical filters to find such companies. It looks for solid past revenue and profit expansion, high profitability measures like Return on Invested Capital (ROIC), strong cash flow production, and a careful debt structure.
A prominent candidate from this strict screening process is ASML HOLDING NV (NASDAQ:ASML), the Dutch company that is the world's only supplier of extreme ultraviolet (EUV) lithography machines needed for making the most sophisticated semiconductors. ASML’s financial picture seems to be a clear model of the traits the screen aims to find.
Matching the Main Quality Investing Standards
The Caviar Cruise screen rests on several basic pillars, and ASML’s reported numbers show a good fit with each.
High Profitability and Capital Effectiveness A central part of quality investing is a company's capability to produce high returns on the capital it uses. The screen asks for a Return on Invested Capital (leaving out cash, goodwill, and intangibles) over 15%. ASML greatly passes this mark with a notable ROICexgc of 73.3%. This means that for every dollar of main capital put into the business, ASML creates a large return, a clear signal of a strong economic moat and high operational effectiveness. This number is important because it shows management's ability in using capital to build shareholder value, a main idea for long-term investors.
Solid and Getting Better Past Expansion The method searches for companies with a shown history of growth. It requires both 5-year revenue and EBIT (earnings before interest and taxes) compound annual growth rates (CAGR) to be over 5%, with EBIT growth being higher than revenue growth—a signal of getting better profitability. ASML’s numbers are persuasive:
- Revenue Growth (5Y CAGR): 12.1%
- EBIT Growth (5Y CAGR): 29.6%
The reality that EBIT growth is more than two times the revenue growth points to important operating leverage and pricing strength, which are typical of a quality business. This indicates ASML has been able to grow its operations effectively, changing added revenue into even larger profits.
Outstanding Financial Condition and Cash Flow Quality investors look for financial strength. The screen uses a Debt-to-Free Cash Flow (FCF) ratio below 5 to make sure debts are easy to handle compared to the cash the business produces. ASML’s ratio of 0.51 is very good, meaning it could clear all its debt in just over half a year using its present yearly free cash flow. This gives large financial room and lowers risk.
Also, the screen asks for a high "Profit Quality," measured as the 5-year average of Free Cash Flow to Net Income, of at least 75%. ASML’s number of 105.3% shows it changes more than 100% of its accounting profits into actual, usable cash. This high cash conversion is important as it pays for innovation, possible purchases, shareholder returns, and gives a cushion against economic slowdowns without needing outside money.
A Top-Level Fundamental Look
A check of ASML’s detailed fundamental analysis report supports the screening outcomes. The report gives ASML a good total fundamental score of 7 out of 10, stating its "excellent profitability score" along with "good financial health traits." Main points include:
- Profitability: Gets a nearly perfect 9/10, with sector-leading margins and returns on equity and assets.
- Financial Health: Gets a firm 7/10, helped by a very low chance of bankruptcy (Altman-Z score of 12.27) and the good debt position noted before.
- Growth: Gets 7/10, recognizing solid past EPS growth and forecasts for continued good revenue and earnings growth in the next few years.
- Valuation: Gets a middle 4/10. The report states ASML sells at a high price based on usual P/E ratios, which is normal for high-quality, high-growth companies, but also says its price looks more fair compared to industry rivals and when thinking about its growth outlook (PEG ratio).
Is ASML a Quality Investment?
According to the numerical filters of the Caviar Cruise screen, ASML Holding NV makes a persuasive argument for quality investors. It shows the three key features of a wide economic moat (through its technological monopoly in EUV lithography), exceptional capital effectiveness, and very strong financials marked by large cash production and little debt. While its present price asks for a high multiple, quality investors often say the best businesses are seldom inexpensive and that paying a fair price for extraordinary quality can be acceptable for a long-term holding.
The Caviar Cruise screen is made to find companies with these durable traits. For investors wanting to look at other companies that meet these strict quality filters, you can see the complete list of outcomes using the Caviar Cruise stock screen.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any security. Investing holds risk, including the possible loss of principal. You should do your own research and talk with a qualified financial advisor before making any investment choices.
