Warren Buffett makes it seem so simple: find high-quality companies, wait for a fair price to buy, then keep them…forever. The problem is of course that these stocks are hard to come by – but there are signs that geo energy resources (SGX: RE4) could be one of them.
Given the uncertainty we’ve seen in the wake of the pandemic, it’s more important than ever to know what to look for in high-quality stocks. This means buying safe and profitable businesses with strong balance sheets. It’s the kind of stock that has the ability to withstand competitive threats and generate eye-popping profits year after year. To do that, they need what Buffett describes as “an economic gap.”
Defensive economic moats allow companies to accumulate returns at above-average rates over long periods of time. Here’s a look at what makes these actions so special – using geo energy resources (SGX: RE4) for example.
signs of strength
Businesses can make themselves very difficult to compete in a number of ways, including:
- Intangible assets – Like brands customers love, valuable patents or regulatory approvals
- Change costs – It may be too expensive, complicated or unnecessary for customers to look elsewhere
- Network effects – When Customers Are Part of a Product, It Creates Extremely Powerful Businesses
- Cost advantages – Superior processes and unique locations and assets make it tough for others to compete
- Large scale – Large infrastructure and distribution networks are powerful barriers to entry in many sectors
When it comes to finding companies with moats, some of the biggest clues are actually in their financial statements. Here’s what they are and why they’re important – and how geo energy resources stands against them:
- High free cash flow rates – the measure of a successful business.
– A high ratio of free cash flow to turnover can be a very positive sign. For geo energy resourcesthe figure is an impressive 42.1%.
- High return on capital employed – the measure of an efficient and profitable growing business.
– An average ROCE over 5 years of more than 12% is an indicator of strong efficiency. For geo energy resourcesthe figure is an eye-catching 25.7%.
- High return on equity (compared to its peers) – the measure of a company making good profits on its assets.
– geo energy resources has an average ROE over 5 years of 24.8%.
- High operating margins (compared to peers) – the measurement of a company with pricing power
– geo energy resources posted an average operating margin over 5 years of 21.8%.
What does this mean for potential investors?
Some of the highest quality stocks on the market have defensible models that can deliver high levels of shareholder return over the long term. But there are no guarantees and it is important to do your own research. Indeed, we have identified some areas of concern with Geo Energy Resources which you can read about here.
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