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Just as when you’re buying a new jacket or set of kitchen knives, paying attention to quality when you are investing in a company’s shares is often a decision which can pay off in the long term. With this in mind, we are exploring how you can go about identifying some of the UK’s very highest quality companies.
While there is no generally accepted definition, quality investing is rooted in traditional fundamental analysis which can be used to identify companies with superior financial health, robust balance sheets and earnings stability.
Why is quality investing out of favour?
These traits are thought to have contributed to the long-term outperformance of quality investing, although the investment style has fallen out of favour in recent times.
Berkshire Hathaway’s Warren Buffett and Charlie Munger are known for their preference for owning high-quality companies with durable competitive advantages and holding them for the long term.
On this side of the Atlantic, Fundsmith founder Terry Smith is also an advocate for quality. “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns,” explains Smith.
Of late, the quality investment style has lagged the general market partly due to the excitement surrounding AI-related stocks and investor enthusiasm for growth and momentum stocks.
According to research by Barclays published in September 2025, the MSCI World Quality index had underperformed the broader MSCI World index by around 11% since the middle of the previous year, its biggest deviation in the past two decades.
Quality investing sits on three core pillars, each with their own financial metrics. The first pillar measures the ability of a company to deliver high returns on the capital provided by shareholders.
This is captured in the ROE (return on equity) which measures after tax profit as a percentage of shareholders equity. Firms which demonstrate a sustainably high ROE implies the existence an economic moat.
Just as a moat around a castle helped keep out attackers, this enables a business to maintain high returns on equity for many years and prevents competitors eroding its economic advantages.
Another popular metric is ROCE (return on capital employed) which is a measure of the ability of a company to deliver profits to all its providers of capital, including debt financing.
The second quality pillar assesses balance sheet strength, and the amount of debt a company uses to run the business. High quality companies tend to have low amounts of debt to run their operations.
This makes them more robust in times of rising interest rates and less sensitive to economic downturns. It is also worth noting that higher amounts of debt may flatter ROE.
The last pillar of quality measures the consistency and reliability of earnings. Quality companies tend to have smooth, predictable earnings, which lowers their overall risk profile.
Quality firm’s also convert a healthy amount of earnings per share into free cash flow. This is the cash left over after accounting for all expenses and investments needed to maintain the competitiveness of a business.
While quality-focused investors don’t ignore valuations altogether, they tend to accept you have to pay a premium for quality companies.
How to create a quality screen
Subscription-based financial software services provided by firm’s like Stockopedia and ShareScope can be used to create a list of companies for further research.
We have used Stockopedia to build a quality screen. First, we narrowed the universe down to companies with a market value of more than £500 million.
The characteristics of quality companies means they tend to be larger, more mature businesses. This step reduces the universe from more than 1,200 stocks to 300.
We are interested in companies which demonstrate sustainably high ROEs of at least 15% a year over the last five years. This further reduces the universe down to 90 names.
Quality companies tend to convert a high ratio of earnings per share into free cash flow. We set the threshold at 80% and above, which reduced the universe to 74 names.
Finally, we want to see evidence of growth in free cash flow. Companies which generate more cash than they need to stay competitive and grow, can provide enhanced shareholder returns through progressive dividends and share buybacks.
We set the threshold at an annualised growth rate of at least 10% a year, which has reduced the universe to 36 companies, which is a more manageable list of names for further research.
Stocks which have demonstrated their quality
Fantasy miniatures maker Games Workshop has been an extraordinary UK success story with the shares gaining 160-fold over the last 30 years, excluding dividends, culminating in FTSE 100 membership in December 2024.
Key to the Nottingham-based company’s success is its vertically integrated business model and ownership of intellectual property. Games Workshop controls the entire value chain, from design and manufacturing, through to distribution and retail stores.
These traits allow the business to earn high returns on equity capital and to generate strong free cash flows.
Global credit data and analytics group Experian has built a strong competitive position through its dual-engine growth strategy.
Experian’s large consumer database allows it to develop unique insights and consumer engagement tools which are then monetised by its B2B (business-to-business) division through targeted offers.
The business benefits from network effects which means the more customers use its services, the more valuable they become, which creates a positive feedback loop, attracting more customers.
The company recently guided for 6% to 8% organic sales growth in fiscal 2026 and margin expansion from operating leverage and productivity gains. Operating leverage is the effect where companies with relatively high fixed costs see operating profit grow faster than revenues during periods of growth. However, the effect also works in reverse, amplifying losses during downturns.
The UK’s largest manufacturer and Europe’s largest defence contractor, BAE Systems has benefited from escalating geopolitical threats and increased defence spending since the invasion of Ukraine.
The shares have risen by 245% over the last five years compared with a 45% gain for the FTSE 100 index.
The company benefits from long-term contracts and recently reported an order backlog of more than £75 billion, providing high sales visibility for many years.
Ashtead enjoys consistent cash flows
Construction equipment rental firm Ashtead benefits from structural growth divers and a dominant market position in the US, where it generates most of its revenues.
The penetration of equipment outsourcing is relatively less developed in the US, providing Ashtead with a growth runway as more firms seek to reduce capital expenditure and gain access to a modern fleet.
Ashtead maintained its full-year outlook after reporting slightly lower than expected first half adjusted pre-tax profit on 9 December, impacted by lower hurricane activity in the second quarter.
Nevertheless, the second largest US equipment rental firm, which operates under the name Sunbelt Rentals, announced a new $1.5 billion share buyback which coincides with its primary listing move to the New York Stock exchange in March 2026. The company’s consistent cash flow has enabled it to reliably grow its dividends over a long period.
It is worth noting that Ashtead runs its operations with relatively high levels of debt financing, raising the risk profile of the group during economic downturns.
The world’s largest catering firm Compass, which serves offices for the likes of Google and Amazon, benefits from the structural growth trend in outsourcing. The global food services market is estimated to be worth around $360 billion a year.
Compass has a 15% market share, which means nearly three-quarters of the market is run by in-house operators. Recent inflationary pressures and increasing regulatory complexity have made it harder for in-house operators.
The company’s scale and expertise allows it to offer better value and higher quality, helping to drive a sustainable increase in market share from first-time outsourcers.
On 25 November Compass reported better than expected underlying operating profit of £3.34 billion for the year ended 30 September and guided for 10% growth in 2026.
Can you invest in quality stocks with trackers?
Investing in individual companies may not suit all investors, so it worth knowing that there are passive fund alternatives which seek to track quality indices developed by index providers such as MSCI and S&P Dow Jones.
The largest and cheapest is the iShares Edge MSCI Quality Factor UCITS ETF which seeks to replicate the performance of the MSCI World Sector Neutral Quality index.
The ETF has £3.2 billion of assets and an annual charge of 0.25% a year. It replicates the underlying index by selecting a sample of the most relevant index constituents.
Martin Gamble: Shares and Markets Writer
Martin Gamble is Shares and Markets writer at AJ Bell. He was previously the Education Editor of Shares Magazine. He has been with the business since 2019.
Martin graduated from the University of Kent in...
