Acuity Brands Inc. (NYSE:AYI) Passes Key Quality Investing Filter with Strong Financials

For investors aiming to assemble a portfolio of lasting, high-grade businesses, the quality investing method provides a structured system. This process centers on finding companies with durable competitive positions, sound financial condition, and the capacity to produce steady, high returns on capital over many years. One useful instrument for this hunt is the "Caviar Cruise" stock filter, which selects for firms displaying high profitability, low debt, and a record of turning earnings into actual cash flow. The filter highlights measures like high Return on Invested Capital (ROIC), profit growth exceeding sales growth, and a good profit quality score, seeking to find businesses made to last and increase value.

A recent prospect found through this filtering process is Acuity Brands Inc. (NYSE:AYI), a top provider in lighting and building management systems. The company's financial picture seems to match several central principles of quality investing, making it a candidate for more detailed study for investors using this method.

Meeting the Core Financial Criteria

The Caviar Cruise filter uses defined, measurable criteria to search for quality. Acuity Brands' recent financial results show it meets these important tests without difficulty:

• High Return on Capital: A main support of quality investing is effective capital use. The filter demands a Return on Invested Capital (excluding cash, goodwill, and intangibles) over 15%. Acuity Brands greatly passes this with a ROICexgc of 53.67%, showing a notable capacity to create profits from the capital put into its main activities.
• Good and Rising Profitability: The method looks for companies where earnings growth is faster than sales growth, a signal of pricing strength and operational effectiveness. Acuity Brands' 5-year EBIT (earnings before interest and tax) CAGR of 10.39% is higher than its revenue growth of 6.30%, satisfying this important condition.
• Notable Cash Conversion: Quality investors value profits supported by genuine cash flow. The filter checks for a 5-year average Profit Quality (Free Cash Flow/Net Income) above 75%. Acuity Brands is notable with a result of 120.07%, indicating it has produced more free cash flow than stated net income over this time, a sign of financial soundness and high-grade earnings.
• Prudent Financial Structure: A sturdy balance sheet is essential. The filter employs a Debt-to-Free Cash Flow ratio under 5 to confirm debts are easily manageable. Acuity Brands' ratio of 1.68 is very low, implying it could clear all its debt with under two years of present cash flow, offering major financial room and risk reduction.

Fundamental Condition and Valuation Setting

Beyond the filter's particular criteria, a wider view of Acuity Brands' fundamentals backs the quality argument. Per a detailed fundamental analysis report, the company receives a good total rating of 7 out of 10, with specific high marks in profitability (score of 9) and financial soundness (score of 8).

• Profitability Standing: The company has sector-leading margins, with a Gross Margin of 47.83% and an Operating Margin of 14.10%, both demonstrating positive growth patterns. Its Return on Equity of 14.55% also places it well against similar companies.
• Firm Financial Soundness: The report affirms the sound balance sheet, pointing to a good Altman-Z score and a Debt-to-Equity ratio of 0.33. While liquidity measures are average for the sector, the excellent solvency metrics indicate low default risk.
• Valuation Points: Valuation is a necessary final step. The report states Acuity Brands trades at a P/E ratio of 20.59, which seems high alone but is actually lower than most of its industry competitors. Its Price-to-Free Cash Flow ratio is also appealing compared to the industry. For a quality investor, paying a fair, not always the lowest, price for a better business is frequently justified.

Analyst Perspectives and Growth Path

The quality investing method appreciates steady performance. Analysts estimate a forward revenue growth rate near 6.30% for Acuity Brands, matching the filter's need for future growth forecasts above 5%. This indicates belief that the company's path, fueled by its move toward smart lighting and building management systems, remains on course. While EPS growth is predicted to slow from its prior strong rate, the core business model focused on energy savings and connected solutions seems well-aligned with lasting industry shifts.

A Candidate for More Study

Acuity Brands Inc. offers a strong example of a company that satisfies a strict, numbers-driven quality filter. Its high returns on capital, better cash generation, clean balance sheet, and rising profitability margins meet the priorities quality investors look for when searching for lasting value builders. While the filter finds possible candidates, it is a first step for more thorough investigation.

For investors wanting to examine other companies that meet similar quality criteria, the Caviar Cruise filter is ready for additional use. You can view and customize the screen here.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.