For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the quality investing philosophy offers a useful framework. This method centers on finding companies with durable competitive strengths, reliable earnings, and sound financial condition, with the plan of owning them for an extended period. One organized method to find these candidates is the "Caviar Cruise" stock screen, which selects for firms displaying better-than-average past revenue and profit expansion, high returns on invested capital, solid free cash flow production, and an acceptable level of debt. The screen stresses not only expansion, but earnings and efficient expansion, looking for businesses that turn accounting earnings into actual cash and produce high returns on the capital they use.
A recent search using this process has identified Zoom Video Communications Inc (NASDAQ:ZM) as a company deserving more attention from investors focused on quality. The provider of the widely used communications and collaboration platform seems to match several central principles of the method.
Performance and Profitability Measures
The Caviar Cruise screen favors companies with a history of increasing both their revenue and earnings efficiently. Zoom's past results in these areas are significant.
- Revenue and EBIT Expansion: The screen calls for at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Zoom comfortably passes these minimums, with a five-year revenue CAGR near 3.9% and a notable EBIT CAGR close to 130%. A central rule requires that EBIT expansion exceeds revenue expansion, pointing to better operational earnings and possible pricing strength. Zoom's numbers clearly satisfy this important condition, showing the company has managed to grow its profits quicker than its sales.
- High Return on Capital: A fundamental part of quality investing is assessing how effectively a company uses its capital. The screen selects for a Return on Invested Capital (excluding cash, goodwill, and intangibles) over 15%. Zoom's measure here is very high at about 72.5%, implying the company creates considerable profit from the central capital used in its operations. This is a good sign of a durable competitive edge and effective management.
- Earnings Backed by Cash: The method values profits supported by cash. The "Profit Quality" measure contrasts free cash flow with net income, with the screen searching for a five-year average above 75%. Zoom's average is a very high 371%, showing the company creates much more free cash flow than its stated net income. This offers great financial room for strategic moves, share buybacks, or managing economic slowdowns.
Financial Condition and Steadiness
Quality investing includes avoiding companies with weak balance sheets. The Caviar Cruise screen contains a debt rule to confirm stability.
- Debt Position: The screen uses a Debt-to-Free Cash Flow ratio, choosing companies that could pay off all debt in under five years using their present cash flow. Zoom is notable here with a ratio of 0.0, showing a balance sheet with no debt and a large cash holding. This clean financial condition removes default risk and offers a sizable safety margin, matching well with the goal of owning lasting, lower-risk investments.
Fundamental Analysis Summary
An examination of Zoom's consolidated fundamental analysis report supports the results from the screen. The report gives Zoom an overall fundamental score of 7 out of 10, observing specific ability in earnings and financial condition.
- Profitability is scored as "excellent" (8/10), with high margins. Zoom's profit margin of 33.17% and operating margin of 23.24% are better than most of its software industry competitors. The report also confirms the favorable pattern of increasing margins in recent years.
- Financial Condition is scored very good (9/10), backed by the no-debt status, high Altman-Z score suggesting low bankruptcy risk, and good liquidity ratios that indicate no trouble meeting near-term commitments.
- Valuation is seen as "fair" (6/10), with measures like its Price-to-Earnings ratio seeming acceptable relative to both the wider market and its industry.
- Growth shows a more varied picture, receiving an average score (5/10). While past expansion in revenue and EPS has been good, analyst forecasts for future growth are more measured, and the expansion rate is slowing. This is a primary area for quality investors to watch, as the method depends on a company's capacity to keep growing over time.
Is Zoom a Quality Investment Prospect?
According to the numerical rules of the Caviar Cruise screen, Zoom Video Communications displays a strong profile for quality investors. It shows the traits the method looks for: historically high and profitable expansion, a very high return on invested capital, excellent translation of earnings into cash, and a very strong balance sheet with no debt. These features point to a business with a good competitive position and effective operations.
Still, the quality investing philosophy also weighs elements beyond figures. Investors need to evaluate Zoom's lasting competitive strengths in a full collaboration software market, the ability of its leadership to manage a post-pandemic shift in expansion, and the long-term direction of its core market. The company's own development into an "AI-powered, open collaboration platform" (Zoom Workplace) shows an ongoing attempt to broaden its competitive edge.
For investors interested in this method, the Caviar Cruise screen can act as a useful beginning for more study. You can view the present list of companies meeting this screen and change the rules yourself using the Caviar Cruise stock screener.
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.
