For investors aiming to assemble a portfolio of lasting, high-standard businesses, the principles of quality investing offer a useful framework. This method centers on finding companies with durable competitive strengths, sound financial condition, and the capacity to produce high returns on capital over many years. One structured way to find these companies is the "Caviar Cruise" stock screen, based on the work of Belgian author Luc Kroeze. This screen uses a set of numerical filters to find firms with a record of profitable growth, high returns on invested capital, strong cash flow production, and reasonable debt. A present example that meets this strict screening is Salesforce Inc (NYSE:CRM).
Fitting the Main Standards for Quality
The Caviar Cruise screen rests on several basic pillars, each meant to assess a different part of a company's quality and endurance. Salesforce's financial picture matches these important measures well.
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Profitable Growth: The screen asks for a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Importantly, it requires that EBIT growth is faster than revenue growth, pointing to better operational efficiency and pricing ability. Salesforce does well here, with a 5-year revenue CAGR of 9.37% and a notable EBIT CAGR of 75.31%. This large gap of profit growth over sales growth shows the company's effective shift toward higher profitability and scale.
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High-Quality Capital Use: A main idea of quality investing is judging how effectively a company uses its capital. The screen requires a Return on Invested Capital (excluding cash, goodwill, and intangibles) above 15%. Salesforce's number of 114.46% is outstanding, showing that for each dollar of core capital invested, the company creates more than a dollar in return. This is a strong sign of a leading business model and effective management.
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Financial Strength and Cash Flow Character: Quality companies do not carry too much debt and produce high-standard earnings. The screen looks for a Debt-to-Free Cash Flow ratio under 5, indicating debt is easy to manage. Salesforce's ratio of 0.65 is very good, meaning it could pay off all its debt in under a year using its present cash flow. Also, the screen checks for a 5-year average Profit Quality (Free Cash Flow/Net Income) above 75%. Salesforce's average of 786.34% is much higher than this, though this very high number needs explanation, it has been affected by large non-cash accounting expenses in recent years, which lowered net income while cash flow stayed strong. This still points to the company's skill in turning accounting profits into actual cash.
A Look at Basic Financial Condition
An examination of Salesforce's wider fundamental analysis report gives a consistent picture that backs the screening outcome. The company gets an overall fundamental score of 6 out of 10, with definite positives and some points to note.
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Profitability is a Main Positive: With a score of 8 out of 10, Salesforce demonstrates very good profitability. It has top-tier margins, with a Profit Margin of 17.91% and an Operating Margin of 21.99%, both better than most software industry companies. Its returns on assets and equity are also good.
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Good Solvency With Liquidity Observations: The company's financial condition scores a 6. Its solvency is very good, supported by the low debt ratios noted before and a sound Altman-Z score. The main point of attention comes from liquidity measures like the Current and Quick ratios, which are below 1. However, considering the company's strong cash flow and profitability, this is more typical of its business model than a signal of trouble.
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Neutral Valuation and Growth: Salesforce's valuation scores a middle 5. While its P/E ratio seems high on its own, it is fair compared to both the software industry and the wider S&P 500, particularly when accounting for its growth and profitability. The growth score is a 6, reflecting a solid past performance combined with forecasts for ongoing, though slowing, revenue and earnings growth in the high single to low double digits.
You can see all the specifics of this analysis in the detailed fundamental report for CRM.
The Importance of These Measures for the Long-Term Investor
The Caviar Cruise standards are not random; they are closely linked to the goals of a quality investor. The emphasis on EBIT growth exceeding revenue growth confirms a business is not only expanding, but also improving and becoming more profitable. A very high ROICexgc, as observed with Salesforce, indicates a durable competitive advantage, here likely coming from the high switching costs and network effects of its leading customer relationship management (CRM) platform. The excellent debt and cash flow measures offer a safety buffer, showing the company can finance its own growth, endure economic slowdowns, and give capital back to shareholders without financial pressure. Combined, these elements describe a durable business structured to increase value over many years.
Finding Other Quality Possibilities
Salesforce Inc serves as a clear example of the kind of company the Caviar Cruise screen intends to find. For investors looking to find other businesses that satisfy these strict standards for profitable growth, capital effectiveness, and financial soundness, you can see the present screen outcomes directly. See the active Caviar Cruise stock screen for additional possible quality investment choices.
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. The data and screenshots presented are based on sources believed to be reliable, but their accuracy cannot be guaranteed. Investing involves risk, including the potential loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
