What is ‘future quality’ and why does it matter?

Finding companies that have high returns today is simple enough; simply run a screen over the market looking for high returns on capital. But the real question is whether the company will continue to produce high returns. According to Iain Fulton, Investment Director at Nikko Asset Management, the odds of a company staying ‘high quality’ in five years’ time are surprisingly low.

“If you look at history, 70 years of data shows that the probability of staying a high return on capital business five years out is only one in five. So only one in five companies can genuinely be ‘future quality.’”

In this short video, Fulton explains some of the reasons companies fail to maintain high returns, and discusses the only Australian company that passed the ‘future quality’ test.

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The future return on investment and the growth of a company's cash flows are key focus points. Iain's team seek companies where the future is not reflected in today's valuations. To find out more click the contact button below.

The stocks mentioned in this wire are for illustrative purposes only and are not a recommendation.