What Makes a Great Company? 5 Simple Metrics Beginners Can Use

Core Insights - Investing should focus on identifying great companies rather than merely seeking cheap stocks, as strong businesses tend to reward shareholders over time through compounding earnings [2][17] - Five beginner-friendly metrics can help investors identify quality companies worth holding for the long term [1][15] Group 1: Importance of Great Companies - Great companies, even if perceived as expensive, tend to provide better long-term returns compared to cheap stocks that may remain undervalued due to underlying business issues [2] - Strong businesses consistently grow cash flow, which is essential for building wealth over time [2] Group 2: Key Metrics for Evaluating Companies - Metric 1: Consistent Revenue Growth Ongoing demand for a company's products or services is indicated by consistent revenue growth, exemplified by Sheng Siong Group Ltd, which grew from S$764.4 million in FY2015 to S$1.43 billion in FY2024, with a 14.4% YoY increase in Q3 FY2025 [4][3] - Metric 2: Healthy Profit Margins Healthy profit margins reflect a firm's pricing power and cost control, with stable or improving margins signaling competitive strength [6][7] - Metric 3: Strong Free Cash Flow Free cash flow (FCF) is crucial for long-term value creation, allowing companies to pay dividends, reinvest, or reduce debt. A decline in FCF despite rising profits may indicate financial stress [8][9] - Metric 4: A Solid Balance Sheet A strong balance sheet, characterized by low net debt and healthy interest coverage, indicates financial well-being. For instance, VICOM Ltd had S$42 million in cash and no debt as of September 30, 2025 [10][11] - Metric 5: Shareholder-Friendly Capital Allocation Effective capital allocation by management, including sustainable dividends and wise reinvestment, significantly impacts long-term returns for investors [12][13] Group 3: Practical Application for Investors - Investors should create a checklist based on these five metrics to quickly identify worthy companies and avoid common mistakes [15] - Emphasis should be placed on free cash flow and balance sheet strength rather than solely chasing high yields [15]