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Does Craneware (LON:CRW) have an economic moat?

21st Mar '19 by Jack Brumby

When it comes to investing, it pays over the long-term to buy and hold the best quality companies possible, because these elite stocks can resist competitive threats year-in, year-out. This cycle of consistent outperformance and reinvestment can lead to incredible compounding returns.

In this article, I'm going to tell you what makes these stocks so special - and I'm going to use Craneware (LON:CRW) as an example. Craneware is a adventurous, mid cap in the Advanced Medical Equipment & Technology industry.  

GET MORE DATA-DRIVEN INSIGHTS INTO LON:CRW »

How can you tell whether a company has a moat?

Moats are desirable because they often guarantee a sustainable competitive advantage. But there are several ways that companies can get them. For example, they might have:

  • Intangible Assets - Such as brands that customers love, valuable patents or regulatory approvals
  • Switching Costs - It might be too costly, complicated or unnecessary for customers to look elsewhere
  • Network Effects - When customers become part of a product it creates tremendously powerful businesses
  • Cost Advantages - Superior processes and unique locations and assets make it hard for others to compete
  • Great Scale - Large infrastructure and distribution networks are powerful barriers to entry in many industries

Has Craneware (LON:CRW) got a moat?

When it comes to searching for companies with moats, some of the biggest clues actually lie in their financial statements. By looking at a small number of important ratios you can get an idea about the competitive strength and profit power in a business.

Here's what they are and why they are important - and how Craneware stacks up against them:

  1. High rates of Free Cash Flow - the measure of a thriving company.
    - A high ratio of free cash flow to sales can be a very positive sign. For Craneware, the figure is an impressive 37.7%.   
  2. High Return on Capital Employed - the measure of a company growing efficiently and profitably.
    - A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Craneware, the figure is an eye-catching 28.0%.
  3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
    - Craneware has a 5-year average ROE of 23.0%.
  4. High Operating Margins (compared to peers) - the measure of a company with pricing power
    - Craneware has a 5-year average operating margin of 27.7%.  

What does this mean for potential investors?

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Craneware that you can find out about here.

Alternatively, if you'd like to find more shares that have some of the characteristics of promising economic moats, you should take a look at this Economic Moats screen.

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