• Identify exceptional-quality, free cash flow compounders
• Monitor their financial performance
Characteristics of exceptional compounders:
- Low or no debt.
- Consistently improving free cash flow per share, year after year.
- High average return on assets (or return on fixed capital for financial companies).
- High quality of earnings (high free cash flow growth in relation to growth of capital expenditures, debt, inventory, receivables, SG&A, dividends).
- Boring. Minimum of management, product, competitive, market drama and uncertainty. (Then there’s Nvidia).
These are the characteristics you’d look for if you were investing in private companies.
Less than one percent of public companies