Defining Quality in Companies

Quality in companies encompasses the dual aspects of value creation and risk management. Value creation is primarily about generating substantial returns on invested capital, and companies that excel in this often have asset-light business models. An example highlighted is Autotrader, which has a market cap of £7 billion but only £15 million in property, plant, and equipment, demonstrating exceptional profitability relative to its low capital expenditures. In contrast, larger companies like BP show high invested capital with comparably lower returns, indicating they haven’t created as much value in the eyes of the market.