- Several main market stalwarts are still shining with quality credentials
- On Aim, quality signs are reassuring but further research is even more important
Some companies that have quality financial characteristics still suffered badly in the pandemic. This is especially true when it comes to small companies in vulnerable sectors. It’s also worth remembering that screens are just a service-skim of ratios computed from a company’s financial statements and analysts’ forecasts, there is scope for mistakes. Still, they are an interesting idea generator, especially on Aim - although here it is doubly important to conduct further research.
Oil exploration company Enwell Energy (ENW) only fails one quality test, namely that it should have had a higher return on equity over its most recent full financial year compared to two fiscal years prior. The oil price fall in 2020 clearly impacted that and now with Brent crude at around $74 per barrel, conditions are more favourable. Still, potential investors should be wary of mistaking a recovery story (the shares are up almost 80 per cent in twelve months) for a sustainable quality play, however well a company scores on all of our tests.
Quality signs without growth, or expected growth that is already expensively priced, can be a potential trap for investors. So with many of the Aim stocks that only fail one test disappointing on measures like our price to earnings growth (PEG) ratio, investors should definitely be sure to dig further into the prospects of the Aim companies flagged as high quality just going by the numbers.
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