For investors looking to assemble a group of lasting, high-achieving businesses, the quality investing method offers a useful structure. This method centers on finding firms with durable competitive strengths, sound financial condition, and the capacity to produce steady, high returns on capital over many years. The "Caviar Cruise" stock screen is built to methodically sort for these features, applying measurable criteria to produce a focused list of possible choices for more study. The screen stresses historical revenue and profit increase, high and getting better returns on invested capital, solid free cash flow production, and a careful balance sheet.
One firm that now meets this strict screen is Cirrus Logic Inc (NASDAQ:CRUS), a creator of mixed-signal processing solutions for audio and high-performance uses. A detailed look shows how its financial picture matches the central ideas of quality investing.
Financial Condition and Capital Effectiveness
A key part of the quality investing screen is a firm's capacity to produce high returns on the capital it uses. This is calculated by the Return on Invested Capital (ROIC), which shows how well a firm uses its money to create profits. The Caviar Cruise screen asks for an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Cirrus Logic greatly passes this mark with a strong ROICexgc of 34.49%. This outstanding number implies the firm has a durable competitive advantage, probably through its owned audio and mixed-signal technologies, letting it earn significant profits from its business investments.
Also, the screen requires a clean balance sheet, judged through the Debt-to-Free Cash Flow ratio. A ratio under 5 is seen as good, meaning the firm could in theory pay off all its debt with less than five years of cash flow. Cirrus Logic is notable with a ratio of 0.0, showing a balance sheet with no debt. This financial strength offers great stability, operational room to maneuver, and protection from increasing interest rates, fitting exactly with the quality investor's liking for low-risk business models.
Profit and Cash Flow Soundness
Quality investors look for not just book profits, but high-standard earnings supported by actual cash. The screen sorts for this by asking for a 5-year average Profit Quality—the ratio of Free Cash Flow to Net Income—over 75%. Cirrus Logic does very well here too, with a notable average of 123.3% over the last five years. This means the firm regularly creates more free cash flow than its stated net income, a signal of excellent earnings soundness and effective capital management. Such firm cash conversion supplies the means for strategic investments, possible purchases, or shareholder rewards without needing outside funding.
The screen also searches for steady and profitable increase, stating that a firm's 5-year EBIT (earnings before interest and taxes) increase should be faster than its revenue increase. Cirrus Logic's EBIT has increased at a compound yearly rate of 16.0% over this time. This measure is important because it shows the firm is not just growing sales, but is doing so profitably, likely through operational effectiveness, pricing strength, or cost benefits—all signs of a quality business.
Fundamental Rating Overview
A look at Cirrus Logic's detailed fundamental analysis report gives a broad check of these positives. The report gives CRUS a total score of 7 out of 10, stating it is "suitable for quality investing." The details point out key areas:
- Profit (Score: 9/10): The firm gets high marks for margins and returns, with a Profit Margin of 20.47% and the mentioned ROIC of 15.05% both doing better than most industry competitors. Both Operating and Profit Margins have gotten better in recent years.
- Financial Condition (Score: 10/10): This top score highlights the firm's flawless balance sheet, pointed out by zero debt and outstanding liquidity ratios (Current Ratio of 7.65).
- Price (Score: 6/10): The stock seems fairly priced compared to its own past and the wider market, trading at a P/E ratio of 15.83, which is lower than 95% of its industry competitors. However, the report notes that future growth forecasts are moderate.
- Increase (Score: 5/10): This is the firm's relative area of less strength. While past increase in EPS (13.6% CAGR) and Revenue (8.16% CAGR) has been firm, analyst forecasts for future revenue and earnings increase are in the low single digits, hinting at a time of settling.
Is It a Quality Choice?
Cirrus Logic makes a strong case for quality investors. It shows outstanding capital effectiveness (high ROIC), very strong financial condition (no debt), and high-standard cash flow production. These are the lasting, measurable features the Caviar Cruise screen is built to find. The main point for a long-term owner, as noted in the fundamental report, would be the firm's growth path. Quality investors must balance its excellent operational performance and financial strength against the present forecasts for slower revenue growth, deciding if its competitive strengths in audio and mixed-signal chips are lasting enough to lead future growth periods.
Find other firms that have these solid financial traits by checking the present Caviar Cruise screening results.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented is based on data provided and should not be the sole basis for any investment decision. Investors should conduct their own independent research and consult with a qualified financial advisor before making any investment.
