In essence, I look for businesses with high cash generating abilities for at least the next 10 years and management that knows how to utilise this cash. See the table below.
| Attribute | Description |
| High ROIC | Return on Invested Capital is a north star metric. I prefer companies having consistent and high ROIC (>25%). This shows how efficiently the company utilises its capital. |
| Consistent earnings growth | The very best companies can grow both EPS and net income consistently. I look for consistency over growth rate. |
| Low long-term debt | Some companies earn high ROIC with the use of debt. I prefer those that can pay over low long-term debt within 3 years. This decreases the chance of a company going into liquidation. |
| Smart use of Earnings | A good company generates tons of cash and management can (i) distribute back cash as a form of dividends, (ii) repurchase own stock or (iii) acquire new companies. I compare how profits the company retains and compare to the growth in EPS. |
| Low Capex requirements | Capital expenditures are a real expense that eats into cash flow. I prefer low Capex companies which can grow organically with little reinvestment needed. |
| Gross profit and net profit margins | I like companies with high gross profit margins (>65% for product businesses) and high net profit margins (>15%). Companies with high GPM show defensibility and wide moats while those with high NPM give higher margin of error (less chance of loss making). |
| Company age | The longer the better, I like those with >50 years of operating history. These are companies which have survived various business and economic setbacks. |
| Competitive advantage | Companies with at least one of these factors make them more attractive: (i) intangible assets like brand names and patents, (ii) switching costs, (iii) network effects, (iv) cost advantages like Walmart, (iv) efficient scale like a rational oligopoly. I write more about it here. |
After I am enticed by the economics of the business, I then determine a fair price to pay. I look mainly at PE ratios and almost never pay anything more than 15x for a business, because that erodes my margin of safety.
If any of you come across business like this, please let me know.
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