For investors looking to assemble a portfolio of lasting, high-performing businesses, the principles of quality investing offer a useful framework. This method centers on finding companies with durable competitive strengths, reliable profitability, sound financial condition, and the capability to produce high returns on capital over time. Instead of searching for large discounts, quality investors frequently accept a fair price for outstanding businesses they can own for many years. One organized way to find such companies is through a strict screening process, like the "Caviar Cruise" screen, which selects for measurable signs of quality like solid revenue and profit growth, high returns on invested capital, strong free cash flow production, and a low debt level.
A recent search using this approach has identified EXLSERVICE HOLDINGS INC (NASDAQ:EXLS), a worldwide operations management and analytics company. A detailed look shows that EXLS seems to match several main quality investing standards, making it a stock deserving of more study for those using this method.
Matching the Main Quality Standards
The Caviar Cruise screen uses a detailed set of financial filters to distinguish possible quality growth companies from the wider market. EXLService Holdings shows ability across many of these important measures:
- High Return on Invested Capital (ROIC): A fundamental part of quality investing, ROIC calculates how well a company produces profits from its capital. The screen demands an ROIC (leaving out cash, goodwill, and intangibles) over 15%. EXLS greatly passes this limit with a number of 40.8%. This shows a very efficient business model where management is using capital at very profitable rates, an important feature for long-term value building.
- Outstanding Profit Quality and Cash Flow: Quality investors value profits supported by actual cash. The screen searches for a five-year average Profit Quality (Free Cash Flow/Net Income) over 75%. EXLS stands out here with a notable average of 118.1%, meaning it has turned more than 100% of its accounting profits into free cash flow. This indicates not only profitability, but financial soundness and a possible ability for shareholder payments, debt decrease, or strategic spending.
- Low Debt Level: A controlled balance sheet is important for stability. The screen uses a Debt-to-Free Cash Flow ratio under 5, showing how many years of present cash flow would be required to repay all debt. EXLS shows a very low number of 1.24, implying it could in theory remove its debt in just over one year with its existing cash flow. This offers a large safety buffer and operational room.
- Solid and Rising Profitability: The screen requires that a company's EBIT (earnings before interest and taxes) growth exceeds its revenue growth over five years, a signal of increasing profit margins and operating efficiency. EXLS states a five-year EBIT CAGR (Compound Annual Growth Rate) of 25.3%, which, while a specific revenue growth comparison is not given in the data, fits with a trend of rising profitability noted in its fundamental report.
Fundamental Condition and Growth Picture
Beyond the specific screen requirements, a wider view of EXLS's fundamental report supports its quality features. The company receives a high total fundamental rating of 7 out of 10, with specific ability in its Profitability (score: 9/10) and Financial Health (score: 8/10).
- Profitability Leader: The company has top-tier margins and returns. Its Return on Equity (25.35%) and Profit Margin (11.91%) are in the highest groups of the IT Services industry. Importantly, all main margins—Gross, Operating, and Profit—have shown steady increase over recent years, indicating pricing ability and effective management.
- Strong Balance Sheet: Financial health signs are solid. An Altman-Z score of 8.05 points to a very small chance of financial trouble. The company's liquidity is also sound, with a Current Ratio and Quick Ratio both at 2.91, easily meeting short-term needs.
- Steady Growth Path: EXLS shows a effective mix of past results and predicted future growth. Over the last five years, Earnings Per Share (EPS) increased at an average yearly rate of 21.93%, helped by revenue growth of 13.15%. Looking forward, analysts expect this progress to persist, with projected yearly EPS growth of 15.23% and revenue growth of 11.93% in the next years.
For a complete look at these measures, you can examine the full fundamental analysis report for EXLS.
Valuation Points
While quality investing looks first at business strength, price is not disregarded. EXLS trades at a Price-to-Earnings (P/E) ratio of 20.71 and a Forward P/E of 17.52. The fundamental report states this is a "rather expensive" price alone but adds important perspective: compared to both its industry group and the wider S&P 500, EXLS is priced at a lower level. Also, its excellent profitability and solid growth prospects may support a higher price. For a quality investor, the issue is whether the present price is a fair point of entry for a business of this quality, not necessarily a large-value bargain.
Conclusion
EXLSERVICE HOLDINGS INC presents a strong example of a company that meets a strict, numerical quality investing screen. Its high returns on capital, excellent cash flow conversion, clean balance sheet, and history of profitable growth represent the traits quality investors look for. The company's place in the high-need areas of data analytics and AI-led operations management suggests it is placed on a lasting, long-term growth path. While its price is not low, it seems acceptable compared to its quality and growth picture. As with any investment, this study should act as a beginning point for more detailed investigation into the company's competitive strengths, management, and long-term business outlook.
Interested in discovering other companies that meet similar quality standards? You can view the present results of the Caviar Cruise screen and change the settings yourself using this link to the stock screener.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any security. Investing includes risk, including the possible loss of principal. Readers should do their own study and talk with a qualified financial advisor before making any investment choices.
