Quality investing is built on the idea of buying and holding companies that demonstrate strong and sustainable competitive advantages, consistent growth, and high profitability. Rather than searching for the cheapest stocks, this approach focuses on firms that can generate above-average returns on invested capital, reinvest their earnings effectively, and maintain healthy financial discipline. One stock that emerges from such a screen is Digi International, Inc. (NASDAQ:DGII), a company whose fundamentals align well with these core quality investing principles.
How Digi International Meets the Quality Criteria
The quality screen used to identify candidates like Digi International applies several rigorous filters designed to isolate businesses with durable growth and sound finances. Digi International checks nearly every box, starting with its exceptional profitability. The most telling figure is the Return on Invested Capital (ROIC), excluding cash, goodwill, and intangibles. Digi scores a staggering 229.16% on this metric, which is well beyond the 15% threshold the screen demands. This indicates that the company is extraordinarily efficient at turning invested capital into profits, a hallmark of a business with a strong economic moat.
Beyond profitability, the screen examines growth quality and financial health. Digi International’s EBIT growth over five years stands at 37.63%, which far exceeds the required 5% and also outpaces its revenue growth—a sign that the company is not just expanding, but doing so with improving operational margins. The debt-to-free-cash-flow ratio is another bright spot. At just 1.13, it sits comfortably under the maximum of 5, meaning Digi could theoretically pay off all its debt in a little over a year using its current free cash flow. This is a clear indicator of financial strength and low risk, exactly what a quality investor looks for.
A High-Level Look at the Fundamental Report
A full breakdown of the numbers can be found in the detailed fundamental analysis report, which gives Digi International a solid 6 out of 10 overall rating. The strength is clearly concentrated in profitability and growth. The company ranks among the best in its industry for operating and gross margins, both of which have been improving in recent years. On the growth front, earnings per share have expanded at a compound annual rate of 48.58% over the past five years, and analysts project continued EPS growth of about 12.86% annually going forward.
However, the report also flags some areas for caution. Liquidity metrics are on the weaker side, with a quick ratio that ranks poorly against peers, and the company does not pay a dividend. Additionally, while the current ROIC is excellent, it remains below the cost of capital, and the company has been increasing its share count and debt levels. Despite these concerns, the combination of strong margins, high free cash flow generation, and a reasonable valuation relative to the industry makes Digi a compelling candidate for further quality-focused research.
Using the Screening Tool for Broader Discovery
For investors who want to find more companies exhibiting these same quality characteristics, the screening methodology is a practical starting point. The exact parameters used to identify Digi International can be replicated to uncover other potential holdings. You can explore the full list of quality-screened stocks to see which other businesses meet these stringent standards. Applying such filters systematically helps remove emotion from the selection process and ensures that only financially robust and well-run companies make it onto the watchlist.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research before making any investment decisions.
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Digi International (NASDAQ:DGII) Stands Out as a High-Quality Stock with 229% ROIC
Quality investing is built on the idea of buying and holding companies that demonstrate strong and sustainable competitive advantages, consistent growth, and high profitability. Rather than searching for the cheapest stocks, this approach focuses on firms that can generate above-average returns on invested capital, reinvest their earnings effectively, and maintain healthy financial discipline. One stock that emerges from such a screen is Digi International, Inc. (NASDAQ:DGII), a company whose fundamentals align well with these core quality investing principles.
How Digi International Meets the Quality Criteria
The quality screen used to identify candidates like Digi International applies several rigorous filters designed to isolate businesses with durable growth and sound finances. Digi International checks nearly every box, starting with its exceptional profitability. The most telling figure is the Return on Invested Capital (ROIC), excluding cash, goodwill, and intangibles. Digi scores a staggering 229.16% on this metric, which is well beyond the 15% threshold the screen demands. This indicates that the company is extraordinarily efficient at turning invested capital into profits, a hallmark of a business with a strong economic moat.
Beyond profitability, the screen examines growth quality and financial health. Digi International’s EBIT growth over five years stands at 37.63%, which far exceeds the required 5% and also outpaces its revenue growth—a sign that the company is not just expanding, but doing so with improving operational margins. The debt-to-free-cash-flow ratio is another bright spot. At just 1.13, it sits comfortably under the maximum of 5, meaning Digi could theoretically pay off all its debt in a little over a year using its current free cash flow. This is a clear indicator of financial strength and low risk, exactly what a quality investor looks for.
A High-Level Look at the Fundamental Report
A full breakdown of the numbers can be found in the detailed fundamental analysis report, which gives Digi International a solid 6 out of 10 overall rating. The strength is clearly concentrated in profitability and growth. The company ranks among the best in its industry for operating and gross margins, both of which have been improving in recent years. On the growth front, earnings per share have expanded at a compound annual rate of 48.58% over the past five years, and analysts project continued EPS growth of about 12.86% annually going forward.
However, the report also flags some areas for caution. Liquidity metrics are on the weaker side, with a quick ratio that ranks poorly against peers, and the company does not pay a dividend. Additionally, while the current ROIC is excellent, it remains below the cost of capital, and the company has been increasing its share count and debt levels. Despite these concerns, the combination of strong margins, high free cash flow generation, and a reasonable valuation relative to the industry makes Digi a compelling candidate for further quality-focused research.
Using the Screening Tool for Broader Discovery
For investors who want to find more companies exhibiting these same quality characteristics, the screening methodology is a practical starting point. The exact parameters used to identify Digi International can be replicated to uncover other potential holdings. You can explore the full list of quality-screened stocks to see which other businesses meet these stringent standards. Applying such filters systematically helps remove emotion from the selection process and ensures that only financially robust and well-run companies make it onto the watchlist.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research before making any investment decisions.
Read full article here »