For investors aiming to create a durable, long-term portfolio, the ideas of quality investing present a useful structure. This method concentrates on finding companies with lasting competitive strengths, reliable earnings, sound financial condition, and the capacity to produce high returns on capital. Instead of searching for steep discounts, quality investors are prepared to pay a reasonable price for outstanding businesses they can hold for many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms displaying solid past revenue and profit increase, high returns on invested capital, strong free cash flow production, and an acceptable level of debt.
A recent use of this screen has brought attention to CINTAS CORP (NASDAQ:CTAS), a top provider of corporate identity uniforms and facility services. A detailed look shows that Cintas matches the central ideas of quality investing well, making it a subject for more study for investors using this method.
Matching the Central Standards for Quality
The Caviar Cruise screen applies several measurable filters to find quality candidates. Cintas not only meets these tests but performs very well in many categories, displaying the financial traits quality investors look for.
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Continued Increase: The screen demands a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Cintas exceeds this easily, with a revenue CAGR of 8.20% and a more notable EBIT CAGR of 14.40%. Importantly, EBIT increase exceeding revenue increase, as shown here, is a central screen filter. This points to better operational efficiency and pricing ability, implying the company is growing more profitable as it expands, a sign of a quality firm.
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Outstanding Capital Effectiveness: Maybe the most important measure for quality investing is Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The screen sets a high standard at 15%. Cintas achieves a remarkable ROIC (leaving out cash, goodwill, and intangibles) of 48.61%. A reliably high ROIC is a clear indicator of a lasting competitive edge, as it shows the company can put earnings back to work at high rates of return, building major long-term value for shareholders.
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Financial Soundness and Cash Flow Character: Quality companies are not weighed down by debt and turn accounting profits into actual cash. The screen caps the Debt-to-Free Cash Flow (FCF) ratio at less than 5, pointing to an acceptable debt level. Cintas performs well with a ratio of 1.67, meaning it could pay off all its debt with under two years of current free cash flow. Also, the screen searches for a 5-year average Profit Quality (FCF/Net Income) above 75%. Cintas averages 102.51%, meaning it turns all its reported earnings into free cash flow and extra. This high-character cash production allows for dividends, share repurchases, strategic purchases, or further debt paydown.
A Broad Look at Cintas's Fundamentals
An inspection of Cintas's detailed fundamental report supports the results from the screen. The company receives a solid overall fundamental score of 7 out of 10, with high marks in Profitability (10/10) and Financial Health (8/10).
- Profitability Leader: The report notes exceptional margins and returns. Cintas's operating margin of 22.98% and return on equity of 42.46% place it in the best group of its industry. That its ROIC is much higher than its cost of capital confirms it is building value.
- Strong Balance Sheet: Beyond the very good debt-to-FCF ratio, the company has a high Altman-Z score of 11.94, showing very little bankruptcy risk. While its debt-to-equity ratio is average compared to similar companies, the report states this is balanced by strong free cash flow.
- Increase and Valuation Setting: Cintas displays steady, mid-single-digit revenue increase with higher EPS increase, backed by positive analyst views for the coming years. The main point of care is valuation. The report marks Cintas's Price-to-Earnings ratio as high compared to both the wider S&P 500 and its own past increase rate. For quality investors, this highlights the need for patience, buying shares in these companies often needs waiting for a better price during market declines.
Is Cintas a "Buy-and-Hold" Quality Company?
Beyond the figures, Cintas shows several non-financial features that quality investors want. Its business model, providing necessary uniform rentals and facility services, is stable during downturns and based on long-term customer agreements, producing steady, repeat revenue. It has a top market position in a divided industry, gaining from size and a good service name. The company's activities are simple to grasp, and it has shown a steady capacity to increase prices and grow margins over time, a sign of pricing ability.
The Caviar Cruise screen is a useful beginning step for finding companies with the financial makeup of quality. Cintas Corp.'s good results across increase, profitability, capital returns, and financial health measures makes it a clear example of the kind of company the screen is made to find.
Find Other Quality Candidates: The Caviar Cruise screen can be used to find other companies with similar strong financial pictures. You can view the present screen results and change the standards yourself using this Caviar Cruise Stock Screener.
Disclaimer: This article is for informational and educational purposes only. It is not intended as investment advice, a recommendation to buy or sell any security, or a statement of any kind regarding future performance. All investing involves risk, including the potential loss of principal. You should conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions.
