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Here's why Ferrexpo (LON:FXPO) is a good long-term stock pick

1st Apr '19 by Ben Hobson

When it comes to investing, I'm convinced it pays to buy and hold the best quality companies possible. These companies can compound investment returns at consistently above-average rates over the long term.

These stocks are different because they've got what billionaire investor Warren Buffett, calls economic moats.

In this article, I'm going to tell you what makes these stocks so special by using Ferrexpo (LON:FXPO) as an example. Ferrexpo is a speculative, mid cap in the Steel industry.

GET MORE DATA-DRIVEN INSIGHTS INTO LON:FXPO »

Has Ferrexpo (LON:FXPO) 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 Ferrexpo 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 Ferrexpo, the figure is an impressive 16.5%.
  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 Ferrexpo, the figure is an eye-catching 28.1%.
  3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
    - Ferrexpo has a 5-year average ROE of 37.8%.
  4. High Operating Margins (compared to peers) - the measure of a company with pricing power
    - Ferrexpo has a 5-year average operating margin of 26.0%.

So it does seem as though Ferrexpo might have some kind of economic moat. A quick look at Ferrexpo's (LON:FXPO) StockReport page shows that the company has a Quality Rank of 75.

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 Ferrexpo 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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