A “quality” company consistently delivers a market-beating return on the shareholder capital it allocates (“Buying ‘quality’ companies has been a bargain”, December 4 2025). It will be growing its profits and investing in additional capacity to scale up its operations.
The quality firm will be able to fund its growth from its own cash flows after funding its capex and R&D, even able to pay dividends or buy back its shares, or repay debt that strengthens its balance sheet.
Strong balance sheets — a high ratio of market value to debt incurred — means reduced risk of default, which reinforces quality. The higher the cash content of these earnings the less reliant the earnings are on write-offs or write-ups of assets, and the more reliable the reported earnings. Quality is defensive.
We have examined the largest JSE-listed companies for their quality characteristics, revealed over the past 10 years, and ranked them accordingly on six measures of performance, and taken a numeric average of these rankings to determine their overall quality ranking.
The main criterion we used to judge quality is the real return on cash invested over the past 10 years (CFROI), to which we add the volatility of CFROI, and the ratio of CFROI to its volatility (the risk-adjusted CFROI) as further quality measures to be ranked.
We then add growth in operating profits (NOPAT) and its volatility to the mix. The chances of a company default and the cash contact of earnings are added as additional criteria to be ranked for our overall quality index.
Clicks demonstrated the highest quality by far, with Vodacom ranked second and Capitec third. BHP, Outsurance and Shoprite follow them. Mr Price ranks sixth, followed by platinum miner Valterra. BidCorp and BAT bring up the top 10.
There is little difference in the observed quality of the other major banks — Absa, FirstRand and Standard Bank. They find a place in the top 15 quality companies, demonstrating good returns on capital but rank lower due to moderate growth in profits.
The recent surge of the gold and platinum miners to the top of the boards on growth in NOPAT and return on capital calculations should be noticed. They consistently rank highly on market return calculations, which have been boosted by the recent surge in precious metal prices. But the volatility of earnings will continue to detract from the “quality” of any mining company, as will their inability to influence the prices received for their production.
Valterra ranked eighth on quality and 13th on return on capital, but 36th on the volatility of these internal returns. Growth in its NOPAT has been impressive, with an average 31% compound annual growth.
Northam, another platinum miner, presents similarly. It is 13th ranked by overall quality, ninth on return on capital, 32nd on volatility of returns on capital, second on growth in NOPAT and 19th on the volatility of NOPAT growth. Its earnings are also almost all covered by cash.
Clicks demonstrated the highest quality by far, with Vodacom ranked second and Capitec third. BHP, Outsurance and Shoprite follow them. Mr Price ranks sixth, followed by platinum miner Valterra. BidCorp and BAT bring up the top 10.
Clicks is ranked first for quality, its real return on capital. CFROI has been 20.3% per annum over the past 10 years. It is ranked third behind BAT (46.7% per annum) and Anheuser (22.72%) on this important metric. Shoprite lags behind Clicks on the return on capital ranking, at 12th on return on capital (10.52%) but with a low standard deviation of these returns.
Capitec has delivered the fourth highest average CFROI (19.38%). It ranks a less-impressive 22nd on the growth in NOPAT table (11% per annum). FirstRand ranks sixth on real return on capital but 31st in growth in NOPAT. Its relatively slow growth in NOPAT is the second most predictable. Standard Bank has grown operating profits similarly to FirstRand but with a lower return on capital.
Richemont appears not to be a top-ranking quality company on the JSE. It ranks 22nd on real return on capital, 14th on risk-adjusted CFROI, 20th on growth in NOPAT and 26th on the volatility of NOPAT growth rates.
Vodocom presents more quality than MTN. On a risk-adjusted CFROI it ranks an impressive seventh and MTN 22nd but lags MTN on the growth in NOPAT at 11% compared to 26% per annum. Vodacom has delivered less variable growth, ranked ninth compared to MTN’s 22nd for its volatility of operating profits.
Vodacom is ranked as the fourth least likely to default on its debt. MTN ranks 26th on this measure. While on the cash to earnings comparison Vodacom ranks 4th, while MTN appears well down this ranking order.
We compare below the stock market performance of the top ten (market cap weighted) with the JSE all share index over the past ten years. The top 10 index would have outperformed the JSE all share index marginally over the past 10 years. Yet the relationship between “quality” and share market returns is not a clearly positive one.
Investing in quality will not always outperform, suggesting that investors have been willing in the past to pay up for the defensive characteristics of a quality company that is far less likely to fail its shareholders, and by so doing reduce realised returns.
Investors should seek companies that will be improving quality over time, and do so before their upcoming quality is widely recognised in its share price.
• Kantor is head of the research institute, and Evans an analyst, at Investec Wealth & Investment. They write in their personal capacities.
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