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  5. GOOG: Hi there, I’m curious to know what you look for in a true compounder. [Alphabet Inc.]
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Q: Hi there, I’m curious to know what you look for in a true compounder. What are the key metrics that catch your eye when analyzing a company and how they make use of their cash.
Asked by Seamus on December 17, 2024
5i Research Answer:

Here is an article we wrote on the topic in November. We would consider capital allocation as one of the most important factors. How does the company finance growth? Ideally, it is all through internal cash flow? (like CSU). Are acquisitions accretive? (like TFII). What is return on equity? Return on capital? How consistent is growth (particularly during recessions)? Is growth higher than the cost of capital? How committed is management (share ownership vs salaries)? How is market share? Does R&D spending result in new growth initiatives (ala GOOG)? Is the business capital intensive or not (preferably not)? Is there a protected market (such as government regulation of a drug company)? Here is another good article that highlights the process and adds in whether valuation is important (generally not, if you have a true compounder). 

Authors of this answer, directors, partners and/or officers of 5i Research and/or affiliated companies have a financial or other interest in GOOG.