Johnson & Johnson's strengths in a time of uncertainty

The best calibre of companies resist competitive threats year-in, year-out, while their competitors fail. This cycle of consistent outperformance and reinvestment can lead to incredible compounding returns – especially in times of worldwide economic uncertainty.

In this article, I'm going to tell you what makes these types of stocks so special, through the lens of economic moats, and using  Johnson & Johnson (NYQ:JNJ) as an example throughout.

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

• Great Scale - Comprised of large infrastructure and distribution networks
• Intangible Assets - Such as brands, patents or regulatory approvals
• Network Effects - When customers become part of a product
• Cost Advantages - Gained through superior processes and unique locations and assets
• Switching Costs - It might be too costly or complicated for customers to leave

Johnson & Johnson (NYQ:JNJ)'s economic 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 Johnson & Johnson 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 Johnson & Johnson, the figure is an impressive 23.8%.
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 Johnson & Johnson, the figure is an eye-catching 15.7%.
3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
   - Johnson & Johnson has a 5-year average ROE of 23.6%.
4. High Operating Margins (compared to peers) - the measure of a company with pricing power
   - Johnson & Johnson has a 5-year average operating margin of 24.2%.

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 Johnson & Johnson that you can find out about here.