Napco Security Technologies (NASDAQ:NSSC) Passes the "Caviar Cruise" Quality Investing Screen

For investors aiming to assemble a portfolio of lasting, high-standard businesses, the principles of quality investing offer a persuasive framework. This method centers on finding companies with durable competitive strengths, high profitability, and sound financial condition, with the goal of owning them for many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms displaying better revenue and profit increases, high returns on invested capital, strong cash flow production, and low debt. A stock that recently appeared from this strict screening process is NAPCO SECURITY TECHNOLOGIES (NASDAQ:NSSC).

Meeting the Core Quality Investing Criteria

The Caviar Cruise screen rests on several measurable pillars of business quality. Napco Security Technologies seems to match these central principles strongly, according to the given financial data.

• High Profitability and Capital Efficiency: A fundamental part of quality investing is a high Return on Invested Capital (ROIC), which gauges how well a company produces profits from its capital base. The screen calls for an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Napco greatly surpasses this with a notable ROICexgc of 58.03%. This shows that management is very skilled at using capital to build shareholder value, a crucial characteristic for a long-term holding.
• Better Profit Increase: The screen requires that a company's Earnings Before Interest and Taxes (EBIT) has increased by at least 5% each year over five years and, critically, that this EBIT increase is faster than revenue growth, indicating improving profitability and possible pricing power. Napco's EBIT has increased at a CAGR of 30.98% over the last five years, easily exceeding the limit and pointing to major operational leverage and efficiency improvements.
• Sound Financial Condition and Cash Flow: Quality companies are not weighed down by too much debt. The screen uses a Debt-to-Free Cash Flow (FCF) ratio below 5 to make sure obligations can be met without difficulty. Napco performs well here with a ratio of 0.0, indicating a balance sheet with no debt. Also, the screen checks for "high-quality" earnings by demanding that, on average, a minimum of 75% of net income turns into free cash flow over five years. Napco's Profit Quality average of 92.84% indicates that its reported profits are reliably supported by actual cash, offering financial room for dividends, share repurchases, or new investment.
• Valuation Points: While the Caviar Cruise screen does not set firm valuation filters, recognizing that quality often comes at a higher price, it notes that assessment is still needed. Napco's current valuation, as mentioned in the fundamental report, seems high on a plain P/E basis but is more moderate compared to its industry group. For a quality investor, paying a sensible price for a better business is frequently better than buying an average one cheaply.

A High-Level Fundamental Perspective

A look at Napco's detailed fundamental analysis report supports the results from the screen. The company receives an overall fundamental rating of 8 out of 10, with top scores of 10 in both the Profitability and Financial Health groups.

• Profitability Power: Napco's margins are a notable feature. It has an operating margin of 25.72%, beating 100% of its industry group, and a profit margin of 23.76%, which places in the top 2.5% of its sector. These margins have been growing in recent years.
• Strong Balance Sheet: The financial health score highlights the company's very secure balance sheet. With no debt, outstanding liquidity ratios (Current Ratio of 7.06), and a very high Altman-Z score, the company has little financial risk.
• Growth Path: While last-year numbers showed some movement, the long-term direction is upward, with a 5-year EPS CAGR of 33.70%. Analysts project this pace to persist, predicting average yearly revenue and EPS growth of about 13-14% in the next few years.

The Quality Investment Thesis for Napco

For an investor using a quality strategy, Napco Security Technologies displays a persuasive profile. It works in the necessary security technology field, providing products for intrusion and fire alarms, access control, and video surveillance, a market with a long-term growth direction fueled by safety needs. The company’s very high ROIC and growing margins point to a lasting competitive edge, likely from proprietary technology and a good name with distributors and installers. Its debt-free balance sheet offers protection during economic slowdowns and the ability to finance future growth from within. While its price needs thoughtful review, the mix of high profitability, financial soundness, and projected growth fits well with the aims of a quality-focused, buy-and-hold investor.

Interested in examining other companies that pass the Caviar Cruise screen? You can locate and adjust the screen for your own research here.

---

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. Readers should conduct their own thorough research and consult with a qualified financial advisor before making any investment decisions.