The 9-step stock evaluation formula.

Consistent top line, earnings & cash flow

Sales revenue, net income, and cash flow from operations should trend consistently upward across a full cycle. If net income is volatile, look through to operating income to see the core trend.

Gross and net margins should be stable or expanding — a business whose margins compress year after year is losing pricing power, regardless of what revenue is doing. Exclude one-off items from the trend; the underlying business is what matters.

Note: banks, property developers and commodity producers will not show smooth cash flow from operations; use sector-appropriate measures for these.

Positive growth rate

PEG = P/E ÷ Expected EPS growth rate

Earnings per share should be growing meaningfully over five years — not just because the business is repurchasing stock, but because the underlying economics are expanding. Sales growth confirms that EPS growth is real and not purely financial engineering.

PEG below 1 signals that growth is not yet priced in. PEG above 2 says the opposite — even a great business can be a poor investment if the market has already paid for a decade of future growth.

Sustainable competitive advantage

An economic moat is what prevents competitors from taking market share when they try. Without one, margins erode, returns on capital fall to the cost of capital, and long-term compounding stops.

Five common moat types: brand (pricing power because buyers trust the name), scale (unit costs lower than rivals can reach), switching costs (customers don't leave because it is painful to), regulatory or IP barriers (rivals legally cannot enter), and network effects (the product gets better as more people use it). Ask which of these the company has — and whether it is widening or narrowing.

Profitable & operationally efficient

ROE = Net Income ÷ Shareholders' Equity
ROIC = NOPAT ÷ (Debt + Equity)

Return on equity tells you how well management converts shareholder capital into profit. Return on invested capital is stricter — it looks at the return on all capital, including debt, and is harder to flatter with leverage.

Both should sit above 12–15% for multiple years. Watch the cash conversion cycle too: if revenue grows but receivables grow faster, the earnings are being funded by the balance sheet rather than by real customers paying on time.

Conservative debt

Debt Servicing = Net Interest ÷ CFO < 30%

A balance sheet that can survive a downturn is non-negotiable. Current ratio above 1 means short-term liabilities are covered. Net debt to EBITDA below 3 keeps the business flexible. Interest expense eating more than 30% of operating cash flow is the point at which the balance sheet, rather than the operating business, starts driving outcomes.

For sector-specific businesses the measure changes: banks should show a CET1 ratio above 10%; REITs should keep gearing below 45%.

Capital allocation & management quality

Management decides what happens to every dollar the business earns. Over a decade, this is often the single largest driver of per-share outcomes — and it is rarely reflected in screens.

Look for four things: meaningful insider ownership (management should eat what they cook), share-count discipline (buybacks executed when the stock is cheap, not when cash is plentiful; avoid chronic dilution through stock-based compensation), acquisition track record (prior deals produced returns above the cost of capital), and dividend policy that matches the business (paid out of free cash flow, not debt).

Price is near or below fair value

Margin of safety is the gap between intrinsic value and price. If fair value is 100 and the price is 70, the investor has a 30% cushion against being wrong on assumptions, cycle timing, or execution. The larger the uncertainty, the wider the margin should be.

The right valuation lens depends on the business:

• Discounted cash flow (DCF) — for stable, cash-generative businesses with predictable operating cash flow.
• Price-to-book — for banks and financial institutions, where equity is the productive asset.
• Dividend yield vs history — for REITs and other yield vehicles, where distributions drive total return.
• Price-to-sales and PEG — for high-growth businesses where earnings are being reinvested and depressed.

No single lens is universal. Apply the one that matches how the business actually makes money, and cross-check with at least one other.

Price structure supports the buy

Price action is not a thesis — but it keeps the investor from buying into a falling knife. Three structures are acceptable:

• Dip in a confirmed uptrend — price pulls back to the 50-day or 150-day moving average and holds.
• Support at a consolidation floor — price trades sideways in a range and is buying at the bottom of it.
• Reversal into a new uptrend — higher highs and higher lows, with price reclaiming the 50-day moving average.

Avoid buying at all-time highs purely on enthusiasm, and avoid catching a knife mid-decline. Waiting for structure costs little and protects a great deal.

Position sizing & risk management

The size of a position, and the way it is built, matters more than most investors admit. Even a correct thesis can be ruined by buying the full position at a single price.

Three disciplines:

• Tranche the purchase. Break the intended position into three or four buys at descending price levels, so the average cost improves if the price falls and the position is still built if it doesn't.
• Cap single-name exposure. A ceiling of roughly 5–8% at cost in any one position limits the damage of being wrong on a single thesis.
• Define the exit before the entry. Know in advance what would invalidate the thesis — a broken moat, a balance-sheet change, a capital-allocation misstep — and act on it. A written invalidation rule is worth more than any price target.