James Halstead's (LON:JHD) share price beyond the short term

Given widespread disruption and uncertainty in the stock market, it is more important than ever to identify high quality stocks for your portfolio. This means safe, profitable companies with strong balance sheets.

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 James Halstead (LON:JHD) as an example. James Halstead is a mid cap in the Construction Supplies & Fixtures industry.

Has James Halstead (LON:JHD) 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 James Halstead 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 James Halstead, the figure is an impressive 18.2%.
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 James Halstead, the figure is an eye-catching 34.3%.
3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
   - James Halstead has a 5-year average ROE of 32.3%.
4. High Operating Margins (compared to peers) - the measure of a company with pricing power
   - James Halstead has a 5-year average operating margin of 19.5%.

So it does seem as though James Halstead might have some kind of economic moat. A quick look at James Halstead's (LON:JHD) StockReport page shows that the company has a Quality Rank of 98.

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 James Halstead that you can find out about here.