For investors looking to assemble a portfolio of durable, long-term holdings, the quality investing philosophy offers a useful framework. This method centers on finding companies with lasting competitive strengths, sound financial condition, and reliable earnings—businesses that do more than endure, they perform well across economic periods. The "Caviar Cruise" stock screen is built to methodically search for these features, using numerical tests for past revenue and profit expansion, superior returns on invested capital, reasonable debt, and trustworthy earnings. The aim is to produce a brief list of companies deserving of more detailed, long-term study as central portfolio holdings.
One company that results from this structured screening process is FORMULA SYSTEMS 1985-SP ADR (NASDAQ:FORTY). This worldwide supplier of software products and IT professional services seems to display a number of attributes that match the quality investing mindset.
Fulfilling the Main Quality Standards
The Caviar Cruise screen uses a detailed group of filters to evaluate a company's basic soundness. Formula Systems presents strong numbers in many of these important categories:
- Outstanding Return on Invested Capital (ROIC): A key element of quality investing, ROIC calculates how well a company produces earnings from its capital. The screen asks for a ROIC (leaving out cash, goodwill, and intangibles) over 15%. Formula Systems greatly passes this mark with a notable number of 173.57%. This shows a very effective use of capital to produce value for shareholders, a main feature wanted by quality investors.
- Sound and Improving Profitability: The strategy stresses not only profit, but improving and dependable profit. The screen searches for a five-year EBIT (earnings before interest and taxes) compound annual growth rate (CAGR) over 5%, which should also be higher than revenue expansion. Formula Systems states an EBIT growth (5Y CAGR) of 14.33%, easily meeting the requirement and pointing to widening operational earnings.
- Prudent Financial Leverage: Quality companies support expansion without excessive dependence on debt. The screen employs the Debt-to-Free Cash Flow (FCF) ratio, favoring a result under 5, which shows how many years of present cash flow would be required to eliminate all debt. Formula Systems displays a good ratio of 2.18, indicating a solid capacity to handle and cover its debt responsibilities from its operational cash production.
- Strong Profit Dependability: This measure evaluates how much of a company's reported net income becomes real free cash flow—the actual cash on hand for dividends, share repurchases, or new investment. The screen aims for a five-year average over 75%. Formula Systems reports a very high average profit dependability of 380.82%, although such a raised number calls for more examination of its cash flow patterns and consistency.
A View of Basic Soundness
Outside the particular screen measures, a wider view of the company's basic profile gives background. Based on its detailed fundamental analysis report, Formula Systems has an overall score of 5 out of 10 compared to others in its IT Services field. The examination shows a varied but mostly stable image:
- Profitability & Margins: The company displays positives in return on equity and operating margin, both doing better than a large segment of the field. Its operating margin has seen gains in recent years.
- Financial Condition: Solvency is a positive area, with the solid Debt-to-FCF ratio mentioned before. Still, liquidity measures like the current and quick ratios are seen as being in the weaker half of the field.
- Valuation: The stock seems costly on a Price-to-Earnings (P/E) basis compared to the wider market, but more reasonable when seen through enterprise value or price-to-free cash flow measures against field competitors.
- Expansion: The company has shown a solid history of past EPS and revenue growth, though an absence of available analyst forecasts reduces clarity on future growth prospects.
Points for the Quality Investor
While the numerical screen points out several appealing traits, the quality investing philosophy also includes subjective assessment. For a company like Formula Systems, investors would probably think about elements such as the longevity of its competitive edge in a divided IT services market, the skills and capital distribution focus of its leadership, and the worldwide spread of its customer list. The screen gives an effective beginning, spotting companies with the financial signs of quality, but it is the following detailed inspection of the business model and competitive position that finishes the study.
Finding Other Quality Prospects
The Caviar Cruise screen is an instrument for finding ideas. Formula Systems is one instance of a company that satisfies its strict filters. Investors wanting to see the complete, present list of companies that meet these quality-oriented standards can run the Caviar Cruise screen themselves.
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 due diligence and consult with a qualified financial advisor before making any investment.
