Identifying quality Swiss stocks and promoting them (5/6)

CRITERION 5: GROWTH IN TURNOVER AND NET PROFIT

Here I calculate the average growth in revenue and net profit over the last 5 or 6 years. Ideally, this growth is at least 5% per year on average, with 10% or more being wonderful.

Significant growth can partly compensate for slightly too low ROE and NPM (e.g. Givaudan or Komax).

For the sake of simplification, I am only comparing the development of net profit at EMS Chemie and Schaffner here, as the trend is comparable at the turnover level:

A simply magnificent curve, with strong regular growth. Net profit doubled between 2010 and 2016!!! Is it the same with your salary?

Once again, Schaffner offers us a curve as stable as a politician's promises...

Schaffner systematically destroys shareholder value, its net profit in 2016 is significantly lower than that of 2010!

I INSIST ON THE IMPORTANCE OF ROE AND NET MARGIN!

Return on Equity (ROE) and Net Profit Margin (NPM) are the most important variables for me, because they are the ones that show me whether a company is PROFITABLE and will be able to sustainably pay dividends.

If I had to keep only two criteria, it would be these two. If I had to keep only one, it would be return on equity (ROE).

What are the top values for ROE and NPM and which are eliminatory? Here, I am interested in the average value of the last 5 to 6 years:

• ROE < 10% = eliminatory
• ROE > 20% = top
• NPM < 5% = eliminatory
• NPM > 10% = top.

This is what Warren Buffett says about ROE: “If you have a business that's earning 20-25% on equity, time is your friend. But time is your enemy if your money is in a low return business.”

A company with a net margin of less than 5% and a return on capital of less than 10% can very quickly go from profit to loss, for example due to an increase in the price of raw materials or a negative effect of exchange rates.

Companies like Rieter, Schlatter, Adval Tech, Arbonia or Phoenix Mecano have a net margin barely wider than an Ethiopian woman's thong! But common sense tells us that the narrower a thong is, the faster one risks finding oneself in... poverty. These stocks are therefore not suitable for a long-term buy and hold investment.

There are many other interesting criteria that I don't use, e.g. free cash flow, ROIC (return on invested capital), EBITDA (earnings before depreciation, interest, taxes, depreciation and amortization),... Everyone should choose the variables that suit them best, become familiar with them and then stick to them.

MORE SUBJECTIVE CRITERIA

Finally, fundamental analysis being more of an art than an exact science, there are other criteria that are more subjective and difficult to quantify.

Examples include the excellence and reputation of a brand (Lindt and Sprüngli), exceptional technical quality (VAT), customer loyalty through the development of products specific to their particular needs (EMS Chemie), or even customer dependence (Altria), the occupation of a niche or niche (LEM) or the difficulty a competitor will have in copying a product (what Warren Buffet calls a "moat": a moat, a competitive advantage).

But what is the right price to pay for such companies?

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