For investors looking to assemble a portfolio of lasting, well-managed businesses, the ideas of quality investing offer a useful structure. This method centers on finding companies with durable competitive positions, reliable earnings, and sound financial strength, with the plan of owning them for many years. One organized way to find these companies is the "Caviar Cruise" stock screen, based on the work of author Luc Kroeze. This screen uses a set of numerical filters meant to find firms with better past results, very good returns on capital, and trustworthy earnings.
FirstCash Holdings Inc (NASDAQ:FCFS) comes up as a result from this screening method. The company runs a big system of pawn shops and offers point-of-sale financing in the United States and Latin America. Initially, its business in consumer finance could appear counter-cyclical, but an examination of the financial numbers shows traits that fit the quality investing view.
Matching the Main Quality Standards
The Caviar Cruise screen employs a few basic filters to judge a company's operational strength and financial care. FirstCash seems to satisfy or pass these important measures:
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High Return on Invested Capital (ROIC): A central part of quality investing, ROIC checks how well a company produces profits from its capital. The screen asks for a ROIC (leaving out cash, goodwill, and intangibles) over 15%. FirstCash shows a number of 17.5%, meaning it is skilled at using capital to build value for shareholders. This points to the company having competitive strengths, like its wide store system and operational knowledge, that let it achieve better returns.
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Firm and Rising Profitability: The screen searches for companies where profit expansion is faster than sales expansion, a signal of operational efficiency and pricing ability. FirstCash displays a five-year EBIT (Earnings Before Interest and Taxes) compound annual growth rate (CAGR) of 24.6%. While a matching five-year sales CAGR was not given in the data, the size of the EBIT growth clearly points to better profit margins over time, an important quality signal.
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Controlled Debt and High Earnings Trustworthiness: Financial durability is essential for quality holdings. The screen requires a Debt-to-Free Cash Flow ratio under 5, so the company could pay off all debt with under five years of cash production. FirstCash is in a good position at 4.7. More notable is its Profit Quality, the change of net income into free cash flow, which averages a strong 147.5% over five years. This high number shows the company's earnings are supported by actual, usable cash, giving great room for dividends, lowering debt, or new investment.
Basic Soundness and Expansion Outline
A wider look at the company's basic report gives background for these screening outcomes. Chartmill gives FirstCash a basic rating of 6 out of 10. The review notes several positive points that quality investors would note:
- Financial Soundness is Good: The company gets high marks for stability and cash availability. It has a high Altman-Z score, showing little risk of failure, and very good current and quick ratios, proving it can cover near-term needs.
- Expansion Path is Favorable: The company has shown good past growth in both sales and earnings per share (EPS). While future sales growth projections are moderate, EPS growth is projected to stay positive.
- Price is a Factor: The report states the stock looks "quite expensive" next to others in its field using standard Price-to-Earnings measures. This is a typical conflict in quality investing, better companies frequently sell at higher prices. The PEG ratio, which includes growth, is said to be in a more acceptable area.
You can review the complete, itemized summary in the detailed basic analysis report for FCFS.
Is FirstCash a Quality Holding?
FirstCash Holdings makes a strong argument for quality investors. It satisfies a strict numerical screen by showing high returns on capital, a good record of profit expansion, a careful debt position compared to its large cash flow, and very high profit quality. These numbers indicate a business with a lasting model, effective operations, and a solid financial position.
Still, the quality investing view also needs subjective assessment. Investors should think about the company's long-term competitive situation in the pawn and retail financing field, its leadership's history of using capital, and how lasting its growth is through different economic periods. The present high price also needs thoughtful study, as even the best business can be a bad investment if bought at a too-high cost.
For investors wanting to use this careful method to locate other possible results, the Caviar Cruise screen provides an organized beginning. You can see the present screen rules and outcomes by going to the Caviar Cruise stock screener.
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Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the chance of losing the original money. You should do your own study and talk with a professional financial advisor before making any investment choices.
