What quality measures
Quality asks whether the company earns a good return on the money invested in it, and whether it can keep doing so. The score blends return on equity, return on capital, gross, operating and net margins, interest coverage, debt to equity, current ratio and three-year revenue growth.
What to look for
High and stable margins usually point to pricing power. Return on capital above the cost of that capital is the clearest sign that growth creates value rather than consuming it.
Interest coverage and debt to equity are the brakes. A high-margin company with thin coverage is one bad year away from a very different story.
Common traps
Return on equity can be flattered by heavy borrowing. Always read it beside debt to equity and interest coverage.
A single strong year is not quality. Look for figures that hold up across the three-year growth measure too.