The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability).
[1] Benjamin Graham, the founding father of value investing, was the first to recognize the quality problem among equities back in the 1930s.
[3] The quality issue in a corporate context attracted particular attention in the management economics literature following the development of the BCG matrix in 1970.
Selection criteria that demonstrably influence and/or explain a company's business success or otherwise can be broken down into five categories:[9] 1.
Having a competitive advantage, quality company offers good product portfolio, well-established value chain and wide geographical span.
Financial Strength: Solid balance sheet, high capital and sales profitability, ability to generate ample cash flows are key attributes of quality company.
Earnings are of high quality, with operating cash flows exceeding net income, inventories and accounts receivables not growing faster than sales etc.
Growth investors thus focus on stocks exhibiting strong earnings expansion and high profit expectations, regardless of their valuation.
Quality investors, meanwhile, favor stocks whose high earnings growth is rooted in a sound fundamental basis and whose price is justified.