CIA ENERGETICA DE-SPON ADR (NYSE:CIG) Passes the "Caviar Cruise" Quality Investing Screen

For investors aiming to assemble a portfolio of durable, long-term holdings, the quality investing philosophy offers a useful framework. This method centers on finding companies with lasting competitive strengths, sound financial condition, and reliable earnings—businesses constructed to endure economic shifts and increase value over many years. The "Caviar Cruise" stock screen puts this philosophy into practice by selecting for firms with a record of sales and earnings increase, good returns on invested capital, solid cash flow generation, and reasonable debt. The aim is not to locate temporary discounts, but to discover superior enterprises deserving of a long-term commitment.

One company that appears from using this strict screen is Companhia Energética de Minas Gerais SA (NYSE:CIG), a Brazilian utility often called CEMIG. As an integrated participant in electricity generation, transmission, distribution, and gas distribution, CIG offers an instructive example for investors focused on quality.

Matching the Main Quality Standards

The Caviar Cruise method highlights several measurable pillars of business quality. CIG’s present financial standing shows agreement with these main principles:

• Effective Capital Use: A main filter for quality is a good Return on Invested Capital (ROIC), which calculates how well a company produces earnings from its capital base. The screen looks for a ROIC excluding cash and goodwill (ROICexgc) over 15%. CIG states a number of 15.31%, showing it meets this important test of capital effectiveness. This implies management has a record of investing shareholder capital into projects that yield good value.
• Solid Earnings Increase: The method searches for companies where profit increase exceeds sales increase, a marker of better operational efficiency and pricing ability. While CIG’s 5-year revenue CAGR is a humble 4.55%, its EBIT (Earnings Before Interest and Taxes) has increased at a solid 5-year CAGR of 17.37%. This notable difference of profit increase over sales increase is a positive indicator, meaning the company has become more profitable over time.
• Good Cash Flow Production: Quality investing values actual cash production over accounting earnings. The screen uses the Profit Quality measure—the ratio of Free Cash Flow to Net Income—and looks for a 5-year average over 75%. CIG does well here, with a notable 5-year average Profit Quality of 139.7%. This shows the company has reliably turned its net income into even larger amounts of free cash flow, offering significant financial options for dividends, debt payment, or new investment.
• Cautious Financial Setup: To confirm durability, the screen examines debt compared to the company's capacity to repay it from cash flow. The Debt-to-Free Cash Flow ratio must be under 5. CIG’s ratio of 3.91 fits easily within this limit, suggesting it could repay all its debt in less than four years using its present cash flow, indicating a careful balance sheet.

A View of Basic Condition

A look at CIG’s wider fundamental analysis report describes a company with clear positives balanced by some particular difficulties. In total, it receives a fundamental score of 6 out of 10.

• Profitability is a definite positive, with scores much better than industry competitors on important measures like Return on Assets, Return on Equity, and the 3-year average ROIC. Its profit margin is also good and has been rising.
• Valuation seems attractive. The stock has a Price-to-Earnings ratio of 7.96 and a Forward P/E of 8.26, which is lower than most of its industry competitors and the wider S&P 500. This may offer a good opportunity for a company with its profitability picture.
• Points of attention involve financial condition and growth expectation. The report mentions a low current ratio, pointing to possible near-term cash limitations, although it is better than many competitors. More importantly, analysts project earnings per share to fall by over 21% in the next few years, which moderates the strong past growth story and explains the market’s lower valuation.

Is CIG a Quality Holding?

CIG offers a detailed case for the quality investor. It clearly satisfies several strict numerical conditions of the Caviar Cruise screen, especially its good ROIC, outstanding cash conversion, and acceptable debt. The reality that its EBIT increase has greatly exceeded its sales increase over five years is a sign of a business enhancing its operational structure.

Still, the quality investing philosophy also weighs less measurable factors and future view. The expected near-term earnings drop, the company’s geographic focus in Brazil (with related regulatory and economic risks), and the capital-heavy, regulated character of the utility industry are significant non-numerical points. These elements may affect its competitive edge and pricing ability—main ideas of quality.

For investors wanting to use this structured method, the Caviar Cruise screen can be a useful first step. You can review the present screen outcomes and method on your own here.

To summarize, CIG displays the financial attributes of an effective, cash-producing business that matches main quality investing measures. It acts as an instance of how screens can find possibilities that justify more detailed, non-numerical investigation. A final choice to invest would need weighing these strong past financial features against a complete evaluation of the company's competitive situation, management caliber, and future possibilities inside its changing industry.

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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 securities. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.