ResMed Inc. (NYSE:RMD) Embodies Quality Investing Principles

For investors aiming to construct a durable, long-term portfolio, the ideas of quality investing present a useful structure. This method centers on finding companies with lasting competitive strengths, sound financial condition, and the capacity to produce strong returns on capital over many years. Instead of searching for the lowest prices, quality investors accept paying a sensible price for outstanding businesses they can hold for a very long time. One organized method for locating these companies is the "Caviar Cruise" stock screen, which selects for firms with good historical revenue and profit increase, high returns on invested capital, reliable cash flow production, and reasonable debt amounts.

A recent run of this screen pointed to ResMed Inc. (NYSE:RMD) as a leading example. The San Diego-based company is a global frontrunner in creating and making digital health devices and cloud-based software for treating sleep apnea, chronic obstructive pulmonary disease (COPD), and other respiratory conditions. We will look at how ResMed's financial profile matches the main ideas of quality investing.

Matching the Main Financial Standards

The Caviar Cruise system focuses on several measurable numbers to judge a company's caliber. ResMed not only matches but frequently goes beyond these strict filters.

• High Profitability and Capital Use: A central part of quality investing is a strong Return on Invested Capital (ROIC), which calculates how well a company creates profits from its capital base. ResMed's ROIC (excluding cash, goodwill, and intangibles) is a notable 66.4%, well above the screen's 15% minimum. This shows management's notable skill in using capital for high-return increase, a main sign of a lasting competitive edge and pricing ability.
• Good and Getting Better Growth Path: The screen requires a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. ResMed provides steady revenue increase of 8.2% and notable EBIT increase of 15.8%. Importantly, EBIT increase is much higher than revenue increase, pointing to widening profit margins and operational effectiveness, a sign of a growing, high-caliber business.
• Notable Financial Condition and Cash Flow: Quality companies are defined by sound balance sheets and the capacity to turn accounting profits into actual cash. ResMed performs well here, with a Debt-to-Free Cash Flow ratio of 0.38. This means the company could in theory pay off all its debt in under five months using its present cash flow, showing very little financial danger. Also, its average Profit Quality over five years is 92.4%, indicating that almost all its reported net income becomes free cash flow, highlighting the durability of its profits.

A Broad Fundamental Look

An examination of ResMed's detailed fundamental report supports the view. The report gives the company a good overall score of 7 out of 10, with especially high marks for profitability (9/10) and financial condition (8/10).

• Profitability Leader: ResMed's margins lead its industry. Its operating margin of 33.5% and profit margin of 27.4% are better than most others in the Health Care Equipment sector. The steady gain in these margins in recent years suggests capable management and a solidifying market standing.
• Sound Balance Sheet: The company's solvency numbers are excellent. With an Altman-Z score showing no bankruptcy danger and a very low debt-to-equity ratio, ResMed works from a place of notable financial security. This offers stability in economic slowdowns and room to fund new ideas or strategic purchases.
• Growth and Price Consideration: While future growth projections are a bit more conservative than the fast past, analysts still forecast steady high-single-digit increase in both revenue and earnings. From a price standpoint, ResMed's stock is not inexpensive on a basic P/E basis, but it trades below its industry peers on several measures, including forward P/E and enterprise value-to-EBITDA. For a quality investor, paying a fair price for a company with this degree of financial soundness and market leadership can be acceptable.

Why This Is Important for Quality Investors

The measurable filters of the Caviar Cruise screen are made to find businesses that show the character traits quality investors value. ResMed's financial results suggest it has many of these traits. Its high and increasing ROIC implies a lasting competitive edge, probably coming from its known brand, wide product system, and large data collection from its cloud-connected devices. The reliable cash conversion and low debt reflect a business model that does not require heavy capital and is run carefully. Also, the company works in a healthcare area supported by long-term, steady trends like an aging population and rising diagnosis rates for sleep disorders, fitting with the quality investing liking for durable, clear businesses.

For investors wanting to review other companies that pass this strict quality check, you can see the present Caviar Cruise screen results here.

Disclaimer: This article is for information only and does not make up financial guidance, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of principal. You should do your own study and talk with a qualified financial advisor before making any investment choices.