The stock market often experiences fluctuating trends, and the beginning of the snake year was no differentDuring the initial week, certain concept stocks demonstrated renewed activity, seemingly capturing the attention of investorsHowever, it is essential to note that these concepts can be fleeting; ultimately, it is the financially sound companies with consistent profitability that provide substantial windows of opportunity for wealth accumulation.

Investors with a keen eye, often referred to as investment gurus, consistently seek out companies with robust cash flows and impressive earning capabilitiesTheir philosophy revolves around the principle of directing their funds to where the profitability is strong, rather than merely chasing after companies that are trendy or showing remarkable short-term growth figuresNotable figures in the investment community, such as Duan Yongping, who emphasizes companies that are “drenched in cash,” advocate for identifying fundamentally sound investments

Similarly, Charlie Munger, the revered value investor, has mentioned that one should fish where the fish are plentiful—an analogy that underscores the merit of investing in proven companies rather than speculative ventures.

Recent statistical analyses reveal that several leading companies in the A-share market have maintained a net return on equity (ROE) exceeding 15% consistently over the past five yearsThis impressive performance is complemented by substantial cash reserves that amount to tens or even hundreds of billions, while their liabilities remain remarkably minimalWith ongoing stock price adjustments, these companies have recently found their valuations at historically low levels, all while offering dividend yields surpassing 3%. Such metrics demonstrate the potential for lucrative returns on investment.

Solid financial data signifies not only the capabilities of a firm but also acts as a protective barrier—or “economic moat”—against competition

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The insights of Pat Dorsey, a Morningstar analyst, emphasize that certain industries inherently generate higher profits due to their economic moatsFor investors who are looking for stable long-term investments, identifying these industries can be a pivotal direction.

Bear markets might alter valuations, yet they do not erode the inherent profit-making capabilities of excellent companiesTypically, outstanding firms command elevated valuations, and bear markets may represent their only real opportunities for investors to purchase at lower pricesWhen stock prices slump, rational investors seek to acquire stakes in firms rich in cash reserves rather than sell off their holdings.

A vital financial metric that should not be overlooked is the net return on equity (ROE). This particular measure provides a comprehensive assessment of a company's profitability, reflecting how efficiently it utilizes the owners' equity

In essence, it gauges the profitability generated from each unit of the shareholders' capital.

Over the last 50 years, the average ROE among American companies stands at 12%. When considering reasonable valuations, companies boasting ROEs above 20% signify superior investment opportunitiesMeanwhile, those reaching over 30% reveal exceptional prospectsFor instance, assessing household names like Coca-Cola and Apple highlights their extraordinary profitabilityThe ROE for Coca-Cola from 2019 to 2023 was consistently strong at 49.61%, 40.48%, 46.2%, 40.51%, and 42.82%, whereas Apple displayed meteoric figures of 49.79%, 84.42%, 122.62%, 157.41%, and 58.74% in the same timeframe.

These highly profitable capabilities, paired with ongoing share buybacks, have led to reduced shareholder equity for both companies, ultimately boosting their ROE beyond 40%. Within the A-share market, leading companies in the food and beverage sector are not far behind

Shanxi Fenjiu showcased ROEs of 27.39%, 35.09%, 42.04%, 44.74%, and 43.06% from 2019 to 2023, while the prestigious Kweichow Moutai posted solid figures of 33.09%, 31.41%, 29.89%, 30.26%, and 34.19% in the same period.

Moreover, the home appliance sector also boasts impressive ROEsGree Electric's recorded figures were 25.72%, 18.88%, 21.34%, 24.19%, and 26.53%. Similarly, Midea Group showcased a steady performance with ROEs marked at 26.43%, 24.95%, 24.09%, 22.21%, and 22.23%. The healthcare sector presents comparable strength, with Mindray Medical achieving 27.91%, 32.29%, 31.92%, 33.38%, and 33.64% during the same period; while Jichuan Pharmaceutical scored 28.43%, 19.89%, 20.46%, 21.91%, and 22.99%.

The impressive profitability and minimal capital expenditures have enabled these companies to amass considerable cash reserves, fulfilling Duan Yongping's description of them as companies “drenched in cash.” He postulates that well-performing firms are often compelled to initiate dividends or buybacks—or both—as their cash flows become significant

For example, according to Kweichow Moutai's 2023 annual report, its cash and cash equivalents stood at approximately 150 billion yuan, while Wuliangye reported 113 billion yuan, Midea Group retained 60 billion yuan, and Hikvision had about 50 billion yuan on hand.

When considering how robust a company's economic moat truly is, investors must thoroughly assess the long-term profitability averages and stability of market shareA company lacking an economic moat risks losing its supernormal profits as competitors move inWhen competition becomes fierce, the firm's profitability can decline sharply, outpacing its growth efforts.

According to Bruce Greenwald, a professor at Columbia University, several dimensions can help gauge whether a business possesses a significant economic moatThe first consideration is the stability of market share among competing firmsRegular market share shifts among competitors suggest a lack of competitive advantage

In contrast, stable market shares indicate that firms are benefiting from their competitive advantages, protecting their respective positions over timeThe less dynamic the competitive landscape, the stronger the protective barrier a firm enjoys, enabling sustained profitability.

The second indicator is the profitability situationIf a firm maintains post-tax capital return rates ranging between 15% to 25% consistently over a decade or more, this serves as compelling evidence of a competitive advantageConversely, returns plummeting to around 6% to 8% signify the absence of such an advantage.

The third factor involves identifying potential sources of competitive advantagesWhen stability and profitability analyses align, investors can make accurate determinations about competitive edgesThis involves scrutinizing whether leading firms are achieving success through proprietary technologies, cost advantages, or customer loyalty founded on high switch-over or search costs