The 8 Quality KPIs Explained

Measures how efficiently the company generates after-tax operating profit relative to the capital invested in the business.

The single most important quality metric. A high ROIC means the business can reinvest capital at attractive rates, the defining characteristic of a compounder.

Measures the proportion of revenue that remains as operating profit before interest and taxes.

Reveals pricing power and operational efficiency. High and stable margins indicate a durable competitive advantage.

Measures the annualised growth rate of the company's revenue over a long period, preferably 10 years.

Indicates market share expansion and pricing power. Consistent double-digit revenue growth is a hallmark of quality compounders.

Measures how quickly the company's free cash flow has grown over 5 years.

Free cash flow growth is the truest measure of value creation. Consistent FCF growth confirms the business model is generating real cash.

Measures the long-term growth rate of operating profit over 10 years.

Operating profit growth. When EBIT CAGR exceeds revenue CAGR, it indicates operating leverage — the business is becoming more profitable as it grows.

Measures the company's total cash and equivalents minus total debt. A positive value means net cash (more cash than debt).

Net cash provides financial flexibility for acquisitions, buybacks, and weathering economic downturns. It is a hallmark of conservatively managed compounders.

Measures how capital-intensive the business is by comparing annual capital expenditures to revenue.

Lower ratios mean the business can grow without requiring constant reinvestment. Asset-light compounders typically have ratios below 10%.

Measures free cash flow generated over the last 12 months relative to the total value of the business (equity plus net debt).

Our preferred valuation metric. It captures the cash return of the entire business regardless of capital structure. A higher yield means cheaper valuation relative to cash generation.

Measures free cash flow generated over the last 12 months relative to the company's equity market value.

A shareholder-focused valuation lens. Shows the cash return generated for equity holders specifically.

Measures how expensive the company is relative to its current operating profit (EBIT).

A profitability-based valuation multiple. Lower multiples suggest cheaper valuation, but must be considered alongside quality and growth.

Divides the forward P/E by the analyst consensus 3-year EPS growth estimate to adjust valuation for expected growth.

A PEG below 1.0x suggests the stock may be undervalued relative to its growth. Above 2.0x suggests premium pricing that may already discount future growth.

Combines dividend yield and buyback yield into a single measure of total capital returned to shareholders.

Measures the total cash return to shareholders. A positive yield indicates management is returning capital, but very high yields may signal lack of reinvestment opportunities.