For investors aiming to assemble a portfolio of durable, high-achieving companies for the long term, the quality investing philosophy offers a strong framework. This method centers on finding businesses with lasting competitive strengths, sound financial condition, and a confirmed history of producing high returns on capital. The "Caviar Cruise" stock screen, based on the ideas of quality investing, uses a set of strict quantitative filters to find these companies. It examines past growth, profit efficiency, balance sheet soundness, and the nature of earnings to distinguish outstanding businesses from the simply adequate.
One company that regularly passes through these strict filters is TEXAS ROADHOUSE INC (NASDAQ:TXRH). The casual dining chain, recognized for its hand-cut steaks and large network of almost 780 restaurants, presents a strong example of what quality investors search for in a possible long-term investment.
Fulfilling the Central Standards for Quality
The Caviar Cruise screen rests on basic pillars of financial performance, and Texas Roadhouse shows ability across many important measures.
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Continued and Profitable Growth: The screen calls for at least 5% yearly growth in both revenue and EBIT (Earnings Before Interest and Taxes) over five years. Texas Roadhouse greatly surpasses this, with a five-year revenue CAGR of 9.09% and a notable EBIT CAGR of 19.65%. Significantly, its EBIT growth is faster than its revenue growth, an indicator of better operational efficiency and possible pricing strength, exactly the type of profitable expansion the method looks for.
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Outstanding Capital Efficiency: A central part of quality investing is a high Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The screen needs an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Texas Roadhouse has an ROICexgc of 20.00%, showing it creates significant value from each dollar put into the business, a sign of a capable company with a solid competitive standing.
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Careful Financial Management: To confirm durability, the screen assesses balance sheet condition by comparing total debt to free cash flow, favoring a ratio under 5. Texas Roadhouse is notable with a Debt/FCF ratio of 0.0, indicating a net-cash position or very little debt. This strong balance sheet offers important stability during economic slowdowns and wide room for strategic plans without the weight of interest costs.
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Superior Earnings: The method examines the change of accounting profits into actual cash. The "Profit Quality" measure, the five-year average of free cash flow to net income, is set above 75%. Texas Roadhouse records a high figure of 122.83%, meaning it produces more free cash flow than its reported net income. This points to very high-grade earnings, solid operational cash production, and effective working capital management.
A View of Basic Strength
A look at Texas Roadhouse’s wider fundamental analysis report supports the image shown by the screen. The company has an overall fundamental rating of 7 out of 10, with especially high scores in Profitability (9/10) and Financial Health (8/10).
- Profitability Leader: The company’s returns (ROA of 13.37%, ROE of 29.90%) are in the best group of the Hotels, Restaurants & Leisure industry. Its margins have displayed steady betterment over recent years.
- Very Sound Health: Even with a low current ratio common for the restaurant sector because of inventory accounting, the company’s solvency is excellent. It carries no debt and an Altman-Z score of 6.75, showing almost no bankruptcy danger and putting it in the top 10% of its industry for financial soundness.
- Growth and Valuation Setting: The company is projected to keep up solid growth, with analysts predicting yearly EPS and revenue growth near 10% and 9%, in that order. It must be stated that the stock sells at a high valuation (P/E of 27.66), which is similar to the S&P 500 but shows the market’s readiness to pay for its high-grade traits. As the quality investing philosophy recognizes, better businesses often have high prices.
Is Texas Roadhouse a Quality Investment?
For investors following the quality philosophy, Texas Roadhouse meets many important conditions. It shows a long-term history of profitable growth, outstanding returns on capital, a clean balance sheet, and produces cash of the highest grade. These are the concrete, measurable features that quality screens like the Caviar Cruise are made to find. They indicate a business with a solid operational model and careful management.
Naturally, quantitative screening is a first step. The complete quality investing method also thinks about less concrete factors like brand power, competitive advantages, and able leadership, areas where Texas Roadhouse’s steady performance and dedicated customer following point to more qualitative ability.
The Caviar Cruise screen can assist in finding other companies with similar sound financial histories. You can review the present screen outcomes and method on your own here.
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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. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.
