Why Hong Kong Exchanges And Clearing (HKG:388) could be a stock to watch

Given widespread disruption and uncertainty in the stock market, it is more important than ever to find high quality stocks for your portfolio. That means safe, profitable companies with strong balance sheets.

We all like the idea of investing in the best quality companies. These multi-bagger stocks resist competitive threats and generate breathtaking profits, especially when the competition collapses. They compound investment returns at consistently above-average rates over the long term because they've got what billionaire investor Warren Buffett calls economic moats.

Here's a quick guide to what makes these stocks stand out - using Hong Kong Exchanges And Clearing (HKG:388) as an example...

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How can you tell whether a company has a moat?

Before we get started on why this looks like a high quality stock, here are some of the main ways that a company can build a strong moat around itself:

• Intangible Assets - Such as brands that customers love, valuable patents or regulatory approval

• Switching Costs - It might be too costly, complicated or unnecessary for customers to look elsewhere

• Network Effects - When customers become part of a product it creates tremendously powerful businesses

• Cost Advantages - Superior processes and unique locations and assets make it hard for others to compete

• Great Scale - Large infrastructure and distribution networks are powerful barriers to entry in many industries

So, has Hong Kong Exchanges And Clearing (HKG:388) got a moat?

When it comes to finding companies with moats, some of the biggest clues actually lie in their financial statements. By looking at a small number of important ratios you can get an idea about the competitive strength and profit power in a business.

Here's what they are and why they are important - and how Hong Kong Exchanges And Clearing stacks up against them:

1. High rates of Free Cash Flow - the measure of a thriving company.
   - A high ratio of free cash flow to sales can be a very positive sign. For Hong Kong Exchanges And Clearing, the figure is an impressive 63.1%.

2. High Return on Capital Employed - the measure of a company growing efficiently and profitably.
   - A 5-year average ROCE of more than 12 percent is a pointer to strong efficiency. For Hong Kong Exchanges And Clearing, the figure is an eye-catching 23.5%.

3. High Return on Equity (compared to peers) - the measure of a company making good profits from its assets.
   - Hong Kong Exchanges And Clearing has a 5-year average ROE of 23.4%.

4. High Operating Margins (compared to peers) - the measure of a company with pricing power
   - Hong Kong Exchanges And Clearing has a 5-year average operating margin of 75.5%.

Next steps

Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But it's important to do your own research and dig into the numbers yourself...

To find out more you might want to take a look at the HKG:388 StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.

To find more stocks with moat-like characteristics, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Moats - which gives you everything you need. So why not come and take a look?