Would Warren Buffett buy Central Asia Metals (LON:CAML)?

Warren Buffett makes it sound so easy: find high-quality companies, wait for a good price to buy, and then hold them forever. Some of these high-quality companies are famous and rarely offer good entry points for investors.

Given widespread disruption and uncertainty in the stock market, it is more important than ever to identify high quality stocks, like those that Buffett looks for. This means buying safe, profitable companies with strong balance sheets when they are at bargain prices.

Others companies, though, are less well-known and have the same ability to resist competitive threats and generate breathtaking profits year after year. These economic moats, which allow the company to compound returns at above-average rates over the long term, might not be priced into the share price.

Let's take Metals & Mining company Central Asia Metals (LON:CAML) as an example.

The telltale signs of an economic moat

There are several ways that companies can build economic moats. For example, they might have:

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

So, does Central Asia Metals (LON:CAML) have a moat?

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 how Central Asia Metals 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 Central Asia Metals, the figure is an impressive 39.3%.   
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 Central Asia Metals, the figure is an eye-catching 22.2%.
3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
   - Central Asia Metals has a 5-year average ROE of 21.4%.
4. High Operating Margins (compared to peers) - the measure of a company with pricing power
   - Central Asia Metals has a 5-year average operating margin of 57.7%.  

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 Central Asia Metals that you can find out about here.