Given the current geopolitical and economic uncertainty, knowing how to identify high-quality stocks for your portfolio is more important than ever. It means knowing how to find highly profitable businesses that can fend off competitive threats over the long term.
These types of stocks are different because they have what billionaire investor Warren Buffett calls economic moat.
Defensive moats allow companies to accumulate returns at above-average rates over long periods of time. They can be an investment goldmine. And while these stocks may be hard to come by, there are signs that Kumho Petro Chemical Co. (KRX:011780) may be one of them.
Before we start explaining why it looks like a high-quality business, here are some of the main ways a business can build a strong moat around itself:
- 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
So the question is whether Kumho Petro Chemical Co. shows signs of profitable competitive advantage – and the way to find out is to look at your finances…
Does Kumho Petro Chemical Co (KRX:011780) have a gap?
Some of the biggest indicators of a gap involve persistently strong margins and high levels of cash generation – cash being very important given the uncertainty surrounding the economy. Here are some ways to assess these characteristics – and how Kumho Petro Chemical Co compares:
- 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 Kumho Petro Chemical Co, the figure is an impressive 17.3%.
- 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 Kumho Petro Chemical Co, the figure is an impressive 20.3%.
- High return on equity (compared to its peers) – the measure of a company making good profits on its assets.
– Kumho Petro Chemical Co has an average 5-year ROE of 20.5%.
- High operating margins (compared to its peers) – the measure of a company with pricing power
– Kumho Petro Chemical Co has a 5-year average operating margin of 13.2%.
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 Kumho Petro Chemical Co which you can read about here.
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