For investors looking to assemble a group of lasting, successful businesses, the ideas of quality investing provide a useful structure. This method centers on finding companies with durable competitive positions, sound finances, and the capacity to produce high returns on capital across many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms showing steady revenue and profit increases, high returns on invested capital, solid free cash flow production, and a careful debt level. The aim is not to locate temporary discounts, but to identify well-managed companies deserving of a lasting ownership position.
A recent search using this process has identified Brady Corporation, Cl A (NYSE:BRC) as a candidate for more detailed review. The maker of identification and safety products seems to match many central beliefs of quality investing.
Matching the Central Quality Tests
The Caviar Cruise screen uses a set of numerical checks to judge a company's past results and financial condition. Brady Corporation's numbers indicate it meets these basic requirements.
- Profitability and Capital Use: A key part of quality investing is a high return on invested capital (ROIC), which shows how well a company uses its funds to create profits. Brady's ROIC (leaving out cash, goodwill, and intangibles) is a notable 41.7%, well above the screen's 15% minimum. This implies the company has meaningful competitive strengths and uses capital with high effectiveness.
- Financial Strength: The screen stresses financial security by looking at the ratio of debt to free cash flow (FCF). A low ratio shows a company can repay debt rapidly from its operating cash. Brady's Debt/FCF ratio of 0.72 is very good, meaning it could pay off all debt in under a year with present FCF. This offers a large safety buffer and operating room.
- Earnings Soundness: Quality investors favor profits supported by actual cash. The screen seeks a five-year average "Profit Quality" (FCF/Net Income) over 75%. Brady's average of 93.8% shows that almost all its stated earnings become usable free cash flow, pointing to sound, maintainable earnings.
- Growth Path: While steady revenue growth is desired, the screen especially values increasing profitability quicker than sales. Brady's five-year EBIT (earnings before interest and taxes) compound annual growth rate (CAGR) of 10.5% satisfies the growth requirement and, according to current information, implies better operational scale and pricing ability over time.
Basic Financial Condition and Price Setting
A wider look at Brady's basic data, as shown in its detailed analysis report, supports the view of a sound business. The company receives high scores for both profitability and financial condition. Its profit margins are among the best in its field, and its balance sheet is solid, with little debt and good cash availability. Growth has been consistent, although analysts expect a slower rate of future increase.
Regarding price, the situation is varied but sensible for a sound company. While Brady's P/E ratio seems high by itself, it sells for less than both its industry group and the wider S&P 500. For a quality investor, paying a fair, not always the lowest, price for a better business is frequently an agreeable exchange.
A Candidate for More Study
Brady Corporation makes a convincing numerical argument as a possible quality investment. Its excellent ROIC, clean balance sheet, and high-grade cash flows match the Caviar Cruise screen's goal of locating financially sound and effectively run companies. The business model, supplying necessary safety, identification, and compliance goods, also suggests the non-numerical traits valued by quality investors, like repeat business and general steadiness through economic changes.
Investors wanting to examine other companies that meet similar strict quality tests can use the Caviar Cruise screen on their own.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. Investing has risks, including the possible loss of the original amount invested. Readers should perform their own study and talk with a qualified financial consultant before making any investment choices.
