Formula Systems (NASDAQ:FORTY) Excels in Caviar Cruise Quality Screen

For investors looking for companies with lasting competitive strengths and lasting growth, the Caviar Cruise screening method provides a structured way to find good investments. This approach highlights long-term business quality instead of short-term price changes, concentrating on firms showing solid revenue and profit increases, high returns on capital, good financial condition, and the skill to turn accounting profits into actual cash flow. The screen uses measurable numbers that indicate operational effectiveness, pricing strength, and financial stability, hallmarks of businesses able to do well through different market periods.

One company that currently meets this strict screening process is Formula Systems (1985) Ltd. (NASDAQ:FORTY), a worldwide supplier of software products and IT professional services. This article looks at how FORTY fits with the main ideas of quality investing as described by the Caviar Cruise method.

Historical Growth and Profitability Increase

A basic need of the Caviar Cruise screen is a shown record of growth, confirming the company is increasing its operations. More critically, it requires that profit increase is faster than revenue increase, a main sign of getting better at operations and possible pricing strength.

• EBIT Growth: FORTY displays a solid 5-year compound annual growth rate (CAGR) in EBIT (Earnings Before Interest and Taxes) of about 14.33%. This is much higher than the screen's lowest requirement of 5%.
• Profitability vs. Revenue: While a precise 5-year revenue CAGR was not in the data given, the good EBIT increase is a main point of focus. The screen values EBIT increase more than revenue increase to separate the results of core operations, as it is less likely to be changed by financial tactics or tax locations. FORTY’s high EBIT increase implies the company is effectively increasing its profitability.

This number is important for the method because it indicates a business that is not only growing larger, but also becoming more profitable, a signal of a good competitive place and good management.

Outstanding Return on Invested Capital

Maybe the most telling number for FORTY is its Return on Invested Capital (leaving out cash, goodwill, and intangibles), which is at an outstanding 173.57%. This is much higher than the screen's already high requirement of 15%.

• ROIC Meaning: ROIC checks how well a company uses its capital to produce profits. A very high ROIC, like FORTY's, shows that the business needs very little capital and is very effective. It implies the company has a strong position, letting it produce large profits without needing constant large investment. For quality investors searching for businesses with built-in strengths, a high ROIC is one of the most wanted traits.

Good Financial Condition and Cash Flow

Quality investing needs a stable balance sheet to manage economic slowdowns. The Caviar Cruise screen checks this by looking at the Debt-to-Free Cash Flow number, which shows how fast a company could pay off its debt using its present cash flow.

• Debt/FCF Number: FORTY's number is about 2.18, which is inside the screen's acceptable limit of under 5. This shows a good ability to pay debts, as it would take the company just over two years to pay back all its debt from its free cash flow. This careful debt level gives a good safety buffer.

High Profit Quality

The screen also checks the quality of a company's earnings by looking at the number of Free Cash Flow to Net Income over a five-year span. FORTY's average profit quality is stated at 380.82%, greatly exceeding the 75% minimum.

• Understanding the Number: A number much above 100% can happen when a company produces cash flow far above its accounting net income, often because of things like good management of working capital or non-cash costs like depreciation. This shows that FORTY's profits are of very high quality and are being changed into real cash, which can be used for dividends, share repurchases, or putting money back into the business.

Summary of Fundamental Analysis

A look at FORTY's detailed fundamental report gives a wider view. The report gives FORTY a neutral overall score of 5 out of 10, showing a mixed situation when compared to others in its IT Services industry. Main points include:

• Profitability: FORTY shows acceptable profitability with an ROIC and operating margin that are better than many of its industry competitors. Its profit margins have gotten better in recent years.
• Valuation: The stock seems fairly valued based on Enterprise Value/EBITDA and Price/Free Cash Flow numbers, where it is valued lower than over 90% of its industry peers, even with a Price/Earnings number similar to the market average.
• Financial Condition: The company's health score is average. While its debt level is manageable compared to cash flow (as pointed out by the screen), its current and quick ratios are lower than many industry peers, suggesting a point for investor review about short-term cash availability.
• Growth: FORTY has a good history of EPS and revenue growth over the last five years, though a shortage of analyst predictions for future growth adds some uncertainty.

Conclusion

Formula Systems (1985) Ltd. makes a good case for quality investors based on the particular filters of the Caviar Cruise screen. Its very high return on invested capital, good historical EBIT growth, careful debt situation, and excellent profit quality match well with the method's goal of finding effective, cash-producing businesses with lasting strengths. While the wider fundamental analysis indicates areas like cash availability that need more study, the main numbers the screen looks for are especially good.

For investors wanting to look at other companies that meet these quality-focused requirements, the Caviar Cruise screen is ready to use here.

Disclaimer: This article is for information only and is not financial advice, a suggestion to buy, sell, or hold any security, or a support of any investment method. Investors should do their own research and talk with a qualified financial advisor before making any investment choices.