Terry Smith
Return on capital first, then cash conversion, then leave it alone.
| Measure | Formula | Median | Middle half | Reporting it |
|---|---|---|---|---|
| Return on capital employed | Operating income ÷ (equity + total debt) | 10.1% | 5.6% – 16.7% | 444 |
| Cash conversion | Operating cash flow ÷ net income | 1.78x | 1.36x – 2.42x | 414 |
| Operating margin | Operating income ÷ revenue | 15.0% | 6.0% – 24.7% | 516 |
| Debt to equity | Total debt ÷ shareholders’ equity | 0.79x | 0.39x – 1.45x | 442 |
Where each comes from
| Return on capital employed | The first of Fundsmith’s three rules is to buy good companies, and the published definition of good starts with a high return on capital employed sustained over time. |
|---|---|
| Cash conversion | Fundsmith reports cash conversion for its portfolio every year, as the check on whether reported profit is real. |
| Operating margin | Gross and operating margins as the evidence of pricing power. |
| Debt to equity | Explicitly avoids businesses that need leverage to produce their returns, banks among them. |
Source: Fundsmith Owner’s Manual and annual shareholder letters.
What this cannot tell you
The second rule, “don’t overpay”, needs a price. This site computes what a business earns; the price box on any company page is where the other half goes.
This page describes a published method and applies its measures to filings. It is not a score, not a ranking and not a recommendation, and no page here aggregates these into a verdict. · All 11 metrics