For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the quality investing method provides a structured system. This system centers on finding companies with durable competitive strengths, sound financial condition, and a demonstrated history of producing high returns on capital over many years. One common systematic method for locating these companies is the "Caviar Cruise" stock filter, which selects for firms showing steady revenue and profit increase, high returns on invested capital, strong cash flow production, and reasonable debt. The filter stresses not only historical results, but the fundamental quality and endurance of a business's profit capacity.
A recent use of this filter has identified Garmin Ltd. (NYSE:GRMN) as a possible candidate for more detailed review by investors focused on quality. The worldwide leader in GPS technology and wearable devices seems to match the central principles of the method closely.
Aligning with the Core Quality Standards
The Caviar Cruise filter uses several measurable criteria to search for quality. Garmin's financial figures indicate a solid match with these conditions:
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Maintained Increase: The filter requires a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Garmin exceeds this easily, with a 5-year revenue CAGR of 8.92% and an EBIT CAGR of 11.01%. Importantly, EBIT increase is faster than revenue increase, a main filter condition that points to better operational efficiency and possible pricing strength, signs of a quality business with scale benefits.
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Outstanding Capital Use: A central part of quality investing is a company's skill in producing high returns on the capital it uses. The filter asks for a Return on Invested Capital (excluding cash, goodwill, and intangibles) over 15%. Garmin performs very well here, with a ROICexgc of 28.10%. This shows the company is very successful at using capital to create profits, building major value for shareholders.
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Financial Strength and Cash Flow Character: Quality companies are defined by sound balance sheets and high-standard profits. The filter selects for a Debt-to-Free Cash Flow ratio below 5 and an average Profit Quality (free cash flow as a percentage of net income) over 75% across five years.
- Garmin's Debt/FCF ratio is 0.0, showing a clean balance sheet with no net debt. This offers great financial adaptability and strength.
- Its 5-year average Profit Quality of 79.10% shows that a large portion of its reported net income becomes actual, available free cash flow. This confirms the lasting nature of its profits and lessens dependence on accounting numbers.
Fundamental Condition in Review
A wider look at Garmin's fundamental profile supports the image shown by the filter. The company's overall financial condition is excellent, receiving a 9 out of 10 in Chartmill's evaluation. Its profitability is solid (scoring 8), supported by sector-leading margins and returns. While its present price seems high compared to some historical and sector benchmarks, earning a valuation score of 2, this is frequently the cost of owning a high-quality enterprise. The company also shows steady increase, with good past results in revenue and EPS and optimistic forecasts for coming years.
For a complete summary of these scores, you can examine the full fundamental analysis report for GRMN.
The Less Tangible Quality Review
While the numerical filter finds solid candidates, quality investing also requires evaluating less concrete elements. Garmin's business model fits well with several of these points. The company works in varied, long-term increase areas like fitness, outdoor activities, aviation, and marine, which are backed by lasting consumer and professional patterns. It has a strong global brand linked with dependability in navigation, a definite competitive edge. Its products, while technologically modern, are typically straightforward for investors to grasp. Also, its lack of debt and reliable cash flow production imply a management group dedicated to financial care and long-term steadiness.
A Beginning for More Investigation
Garmin Ltd. offers a strong example of a company that meets a strict, numerical quality investing filter. Its mix of consistent increase, outstanding profitability, perfect financial condition, and high cash flow conversion meets the main conditions for investors looking for lasting compounders. The Caviar Cruise filter worked well in bringing GRMN forward for a more detailed review.
Investors curious about finding other companies that satisfy these strict quality conditions can use the filter themselves. You can find the current Caviar Cruise filter outcomes and modify the conditions here.
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 thorough research and consult with a qualified financial advisor before making any investment decisions.
