I was working on my low quality businesses article, and to get into some number crunching, I was looking at high quality firms. I’m particularly interested in their fundamentals, so I can spot trends in the numbers and where a company might be heading.
One company that comes to mind is Greggs, and its solid fundamentals, especially its return on capital employed (ROCE).
(Source)
For context, Greggs used to be exposed to the declining foot traffic on the UK’s high streets, but the firm worked to fix it, with good results.
(Source: Google Finance)
The company moved from the high street to transport hubs like railway stations and airports - as well as hospitals, universities, and more is likely, e.g. sit-down spaces in big supermarkets, etc.
There is of course more to its strategy, including product innovation with the vegan sausage roll and other products.
Greggs achieved good returns from the money spent on its changed strategy, as its fundamentals show it.
That’s where return on capital employed (ROCE) is a useful figure I tend to look at across companies (of course always try to understand the fundamentals in the context of the company’s story as well).
(Source)
As for comparison, the same metric for Lloyds is 0.53. For Vodafone it’s -2.23.
Last but not least, while strong fundamentals point to a potentially positive future, there are no guarantees and risk is always present. As an example, Gregg’s exposure to transport hubs means that declining traffic due to the coronavirus might impact its fundamentals and performance this year. Risks like that don’t always manifest in the fundamentals (early enough).