Timeless Financial Models

Introduction

If you’ve ever felt overwhelmed by investing—too many ratios, too much jargon, endless contradictory opinions—you’re not alone. The good news is that a small set of time-tested ideas can take you a very long way. This guide is designed to be your friendly map through that landscape: we’ll walk through 15 classic investing models from well-known investors and authors, and we’ll tie them together with a simple, 20-point quantitative checklist you can use as your daily “instrument panel.”

Think of the models as lenses. Each one focuses on a different part of the investing picture: growth, value, quality, risk, management behavior, or even portfolio construction. No single lens gives you the full truth—real clarity comes from looking through several, then making a decision that balances evidence and your own temperament. The checklist helps you do that consistently, with objective measures and reasonable thresholds.

You don’t need to be a finance pro to use what’s here. I’ll keep the language plain, the structure clear, and the takeaways practical. The goal isn’t to win debates on the internet; it’s to help you build a repeatable process that fits your goals and avoids big mistakes.

How to Use This Guide
The 20-Point Simple Quantitative Checklist
Why This Table Matters (and how to use it responsibly)
The Models — Timeless Frameworks You Can Actually Apply
Explaining Each Item in the 20-Point Checklist
A Practical Workflow: From Idea to Decision
Common Mistakes and How to Avoid Them
Final Thoughts and Next Steps

How to Use This Guide

Skim first, apply later. Don’t worry about memorizing every definition on the first pass. Get the feel of the models and the checklist, then come back to the details as needed.
Start with the checklist. It gives you a quantitative “first sort.” Stocks that pass a decent number of items are more likely to be worth your time.
Layer in the models. Once a stock passes the basic filters, ask: is it a CAN SLIM-type leader? Does it fit GARP? Does it exhibit SES dynamics? Use the models to understand the narrative behind the numbers.
Keep a journal. Note why a stock passed (or failed), what model lens you used, and what would make you change your mind. The best edge in markets is process plus self-awareness.

The 20-Point Simple Quantitative Checklist

Below is a compact table you can copy into your notes. It’s intentionally pragmatic: easy to calculate with public financials and suitable as a screening step before deeper research. You don’t need to pass all 20; think of 12–16 as a strong shortlist and 8–11 as “maybe, dig deeper.” Tough sectors (early-stage biotech, cyclicals) may require context-specific tweaks.

#	Simple check (how to compute)	Pass rule (edit to taste)	Validates	Explanation (simple)
1	EPS YoY (ttm) = Earnings-per-Share now vs a year ago	≥ +25%	CAN SLIM, VCP, SEPA, PEG, GARP	EPS = profit per share. “ttm” = trailing-12-months. Big recent EPS growth means momentum in profits.
2	EPS 3-yr CAGR from last 4 FY EPS	≥ +15%	CAN SLIM, PEG, GARP, VCP, SEPA	CAGR = average annual growth rate. Shows steady profit growth, not a one-off.
3	Sales 3-yr CAGR from revenue	≥ +10%	CAN SLIM, GARP, VCP, SEPA, CTS, SES	Are customers buying more each year? Revenue growth is the engine for future earnings.
4	Gross margin trend = current GM% − last year	≥ 0 pp	4Ms, CAN SLIM, VCP/SEPA	Gross margin = (Sales − Cost of Goods Sold) ÷ Sales. Stable/rising means pricing power or cost control.
5	Operating margin trend = EBIT% YoY	≥ +1 pp	CAN SLIM, GARP, VCP/SEPA	EBIT = Earnings Before Interest and Taxes (profit from operations). Rising % means operations are improving.
6	ROIC ≈ NOPAT ÷ (Net PP&E + Net Working Capital)	≥ 15%	Magic Formula, 4Ms, GARP	ROIC = Return on Invested Capital. NOPAT = Net Operating Profit After Tax. High ROIC = a quality business.
7	ROE with low debt: ROE and D/E ≤ 1.5	ROE ≥ 15% & Debt/Equity ≤ 1.5	4Ms, CAN SLIM	ROE = Return on Equity. High ROE without heavy D/E (debt-to-equity) is safer quality.
8	FCF margin = (CFO − Capex) ÷ Sales	≥ 5%	4Ms, Magic Formula, GARP	FCF = Free Cash Flow; CFO = Cash Flow from Operations; Capex = Capital Expenditures. Cash left after upkeep/growth.
9	Cash conversion = CFO ÷ Net Income	≥ 1.0×	4Ms	Do accounting profits turn into cash? ≥1.0× means cash is keeping up with reported earnings.
10	Interest cover = EBIT ÷ Interest expense	≥ 4×	Z-style risk, 4Ms	Can operations easily pay interest? Higher multiple = lower stress.
11	Net debt / EBITDA	≤ 2.0× (or net cash)	Z-style risk, F-Score (leverage), 4Ms	Net debt = debt − cash. EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization. ≤2× = manageable debt.
12	Asset-turnover trend = Sales/Assets YoY	Rising	F-Score (ATO↑), SES	Asset turnover shows how efficiently assets generate sales. Rising = better use of resources.
13	Shares outstanding YoY	Dilution ≤ 2% (or shrinking)	CAN SLIM (S), 4Ms, AM	Fewer new shares means your slice of the pie isn’t getting watered down; buybacks help.
14	Quick Profit & Cash Health (3-in-1): (i) Net Income > 0, (ii) CFO > 0, (iii) CFO ≥ Net Income	Pass ≥ 2 of 3	Replaces Piotroski F-Score idea; 4Ms	Three easy green flags: profitable, cash-generative, and cash ≥ accounting profit.
15	Liquidity cushion (Current Ratio) = Current Assets ÷ Current Liabilities	≥ 1.5×	Replaces Altman Z-Score idea	Simple solvency snapshot: enough near-term assets (cash, receivables, inventory) to cover near-term bills.
16	Quality-of-Earnings Lite: (i) Receivables growth − Sales growth ≤ 5 pp, and (ii) Accruals ratio = (Net Income − CFO) ÷ Total Assets ≤ 10%	Both true	Replaces Beneish M-Score idea	If receivables balloon faster than sales or accruals (profits without cash) are high, be cautious.
17	Earnings Yield = EBIT ÷ EV	Top 30% or ≥ 8%	Magic Formula, AM	EV = Enterprise Value = market value of equity + debt − cash. Higher EY = cheaper for the cash profits (EBIT) you get.
18	EV/EBIT	≤ 12× (or bottom 30%)	AM, Magic Formula	Flip of #17. Lower Enterprise Value-to-EBIT means paying less for operating profits.
19	PEG = (P/E) ÷ EPS growth (3-yr)	≤ 1.5 (≤ 1.0 ideal)	PEG, GARP	P/E = Price-to-Earnings. PEG checks if the price you pay is fair for the growth you get. Lower = better value for growth.
20	Reinvestment & scale test = (R&D + Capex) ÷ Sales and SG&A% trend	Reinvest ≥ 8% & SG&A% falling 3-yr	CTS, SES	R&D = Research & Development. SG&A = Selling, General & Admin. Investing to grow while overhead % shrinks = scale advantage.

Why This Table Matters (and how to use it responsibly)

The purpose of a checklist is to make good behaviors easy and bad behaviors hard. Think of it like a surgeon’s pre-op checklist: highly trained people still use it because it catches preventable errors. In investing, the “errors” are often emotional—chasing a hot story, ignoring a weak balance sheet, forgetting to check if earnings turn into cash. This table nudges you toward disciplined, repeatable thinking.

A few practical notes:

It’s not a scorecard of truth. Passing 15/20 isn’t a guarantee, and failing 10/20 doesn’t make a stock “bad.” Context matters. Young, asset-light software companies may look different from capital-heavy manufacturers. Adjust thresholds to your hunting ground.
It’s a starting line, not a finish line. Use it to filter a list down to a manageable set, then do deeper research: read annual reports, listen to earnings calls, understand the competitive dynamics.
It helps you compare apples to apples. By running several candidates through the same 20 checks, you’ll quickly see which names are strong across the board and which depend on one fragile pillar.

If you keep it simple—use the checklist for initial filtering, then layer the qualitative models—you’ll likely make faster, calmer, and more consistent decisions.

The Models — Timeless Frameworks You Can Actually Apply

CAN SLIM — William O’Neil

CAN SLIM is a growth-stock framework that became famous through Investor’s Business Daily. The name is an acronym: Current earnings, Annual earnings growth, New (product, management, or high), Supply and demand, Leader or laggard, Institutional sponsorship, and Market direction. In plain English, you’re looking for companies with strong profit growth, a compelling “new” catalyst, limited share supply (no constant dilution), dominance in their niche, support from big money managers, and a favorable overall market trend.

Where CAN SLIM really stands out is its practical blend of fundamentals and timing. O’Neil emphasized buying breakouts from sound base patterns—essentially waiting until the market confirms that a great business is being revalued upward—while cutting losses quickly if the thesis doesn’t play out. That “buy strength, sell weakness” bias can feel counterintuitive to value investors, but it’s a sensible way to ride big winners and avoid sitting in dead money.

For beginners, the magic is in the discipline: focus on high-quality growth (big EPS gains, new catalysts), insist on leadership (strong relative strength), and don’t fight a bad market. Our checklist reflects CAN SLIM’s heartbeat through items like EPS growth (#1–#2), sales growth (#3), margin trends (#4–#5), and dilution checks (#13). If a stock clears these hurdles and the broader market is trending up, CAN SLIM gives you a plan to act decisively.

VCP (Volatility Contraction Pattern) — Mark Minervini

The Volatility Contraction Pattern is a chart-based behavior described by Mark Minervini, a U.S. Investing Champion. Don’t let the word “chart” scare you; the underlying idea is logical: as a strong stock consolidates after a run, its swings (volatility) tend to get smaller over successive pullbacks. That contraction is a sign that sellers are getting exhausted, buyers are more confident, and supply-demand is tightening in favor of an eventual breakout.

What makes VCP useful for non-technicians is its focus on risk. By waiting for successive, tighter pullbacks that “dry up” in volume, you can define a clean entry point near the pivot and place a tight stop-loss just below the most recent contraction low. You’re not guessing; you’re letting the stock show you strength, then you’re stipulating how much you’re willing to risk.

VCP pairs beautifully with CAN SLIM fundamentals. If a business has strong earnings and revenue growth, improving margins, and market leadership—and the chart shows a VCP—then you’re looking at a situation where the numbers, the story, and the behavior align. That alignment is rare, and it’s what powers the kind of asymmetric trades Minervini advocates: smaller losses, potential for large gains.

SEPA (Specific Entry Point Analysis) — Mark Minervini

SEPA is Minervini’s broader framework for aligning fundamentals, technicals, and risk management to pinpoint high-probability entries. Think of SEPA as a decision checklist for timing: the fundamentals are strong (sales, earnings, margins), the industry and market backdrop support higher prices, the stock’s base is constructive (often a VCP), and you have a clear, low-risk entry point with a predefined exit if wrong.

The “Specific Entry Point” part matters. Many investors do 90% of the work—find a great business, decide it’s worth owning—and then wing the buy decision. They chase on a green day or buy early in a deep base. SEPA brings structure to that last mile. It says: define the pivot, wait for confirmation, control risk. That structure is what helps you turn good research into good trades.

In our checklist, SEPA’s DNA shows up in growth checks (#1–#3), efficiency/margin strength (#4–#6), and dilution (#13). But SEPA also emphasizes a healthy market and leadership—elements you’ll incorporate outside the table by looking at relative strength and broader indices. If you’re new to timing, SEPA is a friendly on-ramp: it doesn’t require mastering arcane patterns; it just demands that you respect entry quality and risk.

PEG Ratio — Peter Lynch

Peter Lynch popularized the PEG ratio—Price/Earnings divided by growth rate—as a straightforward way to judge whether a growth stock is expensively priced. The logic is charmingly simple: if a company is growing earnings at 20% per year, paying a P/E near 20 (PEG ~ 1) may be fair; paying a P/E of 40 (PEG ~ 2) might be steep. Of course, it’s a rule of thumb, not a divine law, but it helps newcomers translate “how much growth am I getting for the price I’m paying?”

PEG works best when growth is steady, earnings are meaningful (not dominated by one-offs), and the industry has some visibility. It becomes noisy when earnings swing wildly or when companies reinvest so heavily that reported earnings understate true power (think early Amazon). In those cases, PEG can punish what is actually long-term value creation.

In the table, PEG is codified in item #19. It complements growth checks (#1–#3) by adding the “is the price fair for that growth?” angle. Use PEG as a conversation starter, not the final word. If PEG is low and quality is high, lean in. If PEG is high but the business has a rare moat and long runway, think deeper before discarding it.

GARP (Growth At a Reasonable Price) — Peter Lynch / T. Rowe Price Jr.

GARP isn’t a formula; it’s a mindset. It says: I want growth, but I don’t want to overpay. In practice, that means preferring companies with solid, sustainable earnings growth and decent returns on capital, but avoiding the hottest, most speculative stories where price embeds perfection. It’s the happy middle between deep value (cheap, often with issues) and momentum growth (great stories, often pricey).

The art in GARP is judging “reasonable.” That’s where context matters: industry maturity, competitive dynamics, and reinvestment needs. A software company reinvesting in growth might justify a higher multiple than a slow-growing utility. GARP investors spend time understanding how growth is produced—is it from price hikes, unit expansion, acquisitions, or mix?—and whether it’s repeatable.

Our checklist’s growth items (#1–#3), margin trends (#4–#5), ROIC (#6), and valuation (#17–#19) all serve a GARP lens. If you can find companies that score well on quality and growth while trading at fair, not frothy, valuations, you’re playing a game with favorable odds. GARP also naturally curbs FOMO: if the price runs far ahead of fundamentals, GARP says “wait.”

Magic Formula (ROC + Earnings Yield) — Joel Greenblatt

Joel Greenblatt’s Magic Formula boils investing down to two metrics: how much profit a company generates on the capital it uses (Return on Capital), and how much you’re paying for those profits (Earnings Yield). Rank the market by both, buy a basket of the top-ranked names, and be patient. It’s a “boring superpower”—simple enough to do, hard enough psychologically to stick with.

The beauty here is alignment with common sense. High Return on Capital indicates a business that can turn $1 of reinvestment into more than$ 1 of value without heavy incremental investment. High Earnings Yield means you’re not overpaying for that engine. Together they screen for quality at a price. No flamboyant narrative required.

In the checklist, ROIC lives in #6, while Earnings Yield and EV/EBIT are #17 and #18. You can approximate Magic Formula by insisting on, say, ROIC ≥ 15% and EV/EBIT ≤ 12×, or ranking your universe on both and picking overlap winners. Greenblatt’s key caveat is patience: results play out over years, not weeks, and the strategy can underperform in stretches. If you can tolerate that, it’s a robust core approach.

4Ms — Phil Town

Phil Town’s 4Ms—Meaning, Moat, Management, Margin of Safety—push you to think like an owner. Meaning asks: do you understand and care about this business? If not, your conviction may evaporate at the first sign of trouble. Moat evaluates competitive advantage: brand, network, cost structure, switching costs—whatever keeps rivals at bay. Management evaluates integrity and capital allocation: do leaders tell the truth, and do they put your capital to good use? Margin of Safety is the cushion between your conservative estimate of value and the price you pay.

The 4Ms complement the numbers. Moat shows up indirectly through high, stable ROIC and good margins (#4–#6). Management quality leaves fingerprints in cash conversion (#9), sensible leverage (#10–#11), and lack of dilution (#13). Margin of Safety is about valuation (#17–#19) relative to your estimate of intrinsic value. Meaning, while personal, matters because knowing why you own something helps you sit through normal volatility.

If you’re new, the 4Ms offer a north star: never let a spreadsheet trick you into owning something you don’t understand; never pay a price that leaves no room for mistakes; prefer businesses that win for structural reasons, not just because times are good; and partner with managers who treat shareholders like partners. The checklist helps you spot where those ideals show up in the financials.

Piotroski F-Score — Joseph Piotroski

The Piotroski F-Score is a nine-point system designed to spot strong balance sheets and improving fundamentals among cheap stocks. It awards one point for each of nine signals across profitability (positive net income, positive cash flow from operations, CFO > net income, rising ROA), leverage/liquidity (lower leverage, higher current ratio, no dilution), and operating efficiency (higher gross margin, higher asset turnover). Stocks with 7–9 points often outperform other cheap stocks.

F-Score shines when you’re fishing in value ponds—low price-to-book names where quality varies widely. It’s a way to avoid value traps by favoring those with improving fundamentals. If you’re not buying “cheap on book” stocks, F-Score still teaches a useful habit: prefer positive and improving business health.

In our checklist, we distilled F-Score’s spirit into simpler checks: profitability and cash health (#14), solvency (#15), accrual quality and receivables sanity (#16), dilution (#13), and asset turnover trend (#12). These cover the main guardrails Piotroski emphasized without requiring the full nine-point scoring. Advanced users can still compute the full F-Score for deeper dives.

Altman Z-Score — Edward Altman

The Altman Z-Score predicts bankruptcy risk using a weighted blend of five ratios (working capital/total assets, retained earnings/total assets, EBIT/total assets, market value of equity/total liabilities, and sales/total assets). It’s a classic credit model: lower scores mean higher distress risk. For many investors, it’s a quick “avoid the landmines” filter.

While Z-Score was built for manufacturers in the 1960s, the intuition travels: robust profitability, healthy equity cushions, decent efficiency, and comfortable liquidity add up to resilience. That’s exactly what you want to avoid nasty surprises. But like any formula, it has blind spots in modern, intangible-heavy businesses.

In the checklist, we approximate the practical heart of Z-Score with simpler, widely used safety checks: interest coverage (#10), net debt to EBITDA (#11), and current ratio (#15). These don’t reproduce Z-Score, but they accomplish the everyday goal: screen out companies that will struggle to meet obligations if conditions worsen. If you’re comfortable, you can compute Z-Score as a second pass on borderline names.

Beneish M-Score — Messod Beneish

The Beneish M-Score is designed to flag the risk of earnings manipulation. It blends metrics like days sales in receivables, gross margin index, asset quality, sales growth, depreciation index, SG&A index, leverage index, and total accruals to spot suspicious patterns. The point isn’t to accuse; it’s to tread carefully when the numbers don’t quite pass the smell test.

Many investors don’t have the time or appetite to compute M-Score for everything they look at. That’s okay. You can still protect yourself by watching for two common red flags: receivables growing much faster than sales (maybe the company is booking sales it hasn’t collected) and high accruals (profits without cash). That simple approach catches a lot of avoidable trouble.

That’s why our checklist includes #16 (Quality-of-Earnings Lite): it checks whether receivables growth exceeds sales growth by more than 5 percentage points and whether accruals exceed 10% of assets. If either tripwire goes off, you don’t have to panic; just move the name into the “needs a deeper look” bucket. It’s a time-efficient safety valve.

Acquirer’s Multiple (EV/Operating Earnings) — Tobias Carlisle

The Acquirer’s Multiple is essentially EV/EBIT (enterprise value divided by operating earnings). It asks: if you bought the entire company—paying for equity and debt, pocketing the cash—how many dollars would you pay for each dollar of operating profit? Lower is better. It’s an owner’s lens, not a trader’s lens, and it’s especially useful in mature, cyclical, or asset-heavy industries.

The idea resonates because acquirers think this way: what am I paying for the cash machine? Investors often get dazzled by revenue stories, but when the music stops, earnings and cash flow matter. By focusing on operating earnings, you anchor on the part of the business that pays interest, taxes, and owners.

In the checklist, AM appears as #18 (EV/EBIT) and is echoed in #17 (Earnings Yield, the inverse). Many investors simply sort their universe by EV/EBIT, avoid structural losers, and build diversified portfolios of the lowest decile. It’s deceptively simple—but the discipline of ignoring stories and focusing on price-for-profit is powerful in commodity-like sectors where moats are scarce.

NCAV (Net-Net) — Benjamin Graham

Benjamin Graham’s Net-Net approach is the epitome of deep value: buy stocks trading below their Net Current Asset Value (current assets minus all liabilities). In effect, you’re buying the company for less than the cash, receivables, and inventory it owns—assigning zero value to long-term assets and the ongoing business. It’s like buying a dollar for fifty cents because the market is that pessimistic.

Net-Nets are rare in today’s market, most common in small, beaten-up names and special situations. Many will be mediocre businesses, and a few will be frauds. That’s why diversification is crucial if you pursue this path: you expect lots of small wins and a few big ones, not a parade of superstars.

Even if you never buy a Net-Net, the mindset is instructive. It teaches you to anchor on downside protection: what is this company worth in a fire sale? For the rest of us, some of that caution is captured by our solvency checks (#10–#11, #15) and our quality-of-earnings filters (#16). Graham’s spirit says: be painfully honest about what can go wrong and insist on a margin of safety.

Capacity To Suffer — Thomas Russo

Thomas Russo coined “Capacity To Suffer” to describe owner-operators who can reinvest heavily and endure years of lower reported earnings to build dominant long-term positions. Think of a consumer brand expanding internationally: the up-front marketing and distribution costs depress earnings now, but over time, the brand’s footprint and pricing power can compound for decades.

This idea is crucial because GAAP earnings don’t always capture value creation in early stages of reinvestment. An investor overly focused on near-term margins might miss businesses planting seeds that later yield a harvest. Russo looks for leaders with both the financial ability and the temperament to accept short-term pain for long-term gain—and for investors willing to ride with them.

In the checklist, CTS shows up in #3 (sales growth), #20 (reinvestment and scale), and the willingness to tolerate temporarily lower margins if reinvestment is driving a durable advantage. The trick is discernment: not all spending is investment. Look for rising customer adoption, improving unit economics, and eventual operating leverage (overhead % falling). That’s “suffering” with purpose.

Scale Economies Shared — Nick Sleep

Nick Sleep’s insight is as elegant as it is powerful: when great companies grow, their costs per unit often fall. If they choose to pass some of those savings back to customers—through lower prices or better value—they can stimulate even more demand, creating a self-reinforcing loop. Over time, this “scale economies shared” approach can build the widest of moats.

The classic modern examples are retailers and platforms that relentlessly lower the total cost to customers. By choosing to give away some of the benefit of scale instead of maximizing short-term margins, they increase customer loyalty, expand the market, and scare off less disciplined competitors. It’s a flywheel that compounding loves.

In our checklist, SES appears in #12 (asset-turnover trend) and #20 (reinvestment + shrinking SG&A percentage). You’re looking for proof that scale is real (efficiency improves as you grow) and that it’s shared (customers get a better deal). Over time, those patterns are visible in rising revenue with steady or rising margins, improved asset efficiency, and large, durable market share.

Permanent Portfolio — Harry Browne

Harry Browne’s Permanent Portfolio is a simple, crisis-resilient asset allocation: 25% in stocks, 25% in long-term government bonds, 25% in cash equivalents (or short-term bonds), and 25% in gold. The idea is not to shoot the lights out; it’s to be prepared for any macro environment—prosperity, deflation, inflation, or recession—without having to predict the future.

Why include this in a stock-picking guide? Because portfolio construction matters as much as stock selection. Even if you’re an enthusiastic stock investor, having a “sleep-well” core can reduce the pressure to force trades and can make your overall plan more resilient. Browne’s approach exemplifies humility: we don’t know what’s coming, so we diversify intelligently.

You don’t have to adopt the exact 25/25/25/25 split to learn from it. The lesson is to think in regimes: which assets protect me if inflation hits? If growth collapses? If rates fall? Whether you use Browne’s template or build your own, the point is to balance offense (stocks) with protection (bonds, cash) and insurance (gold), then rebalance dispassionately.

Explaining Each Item in the 20-Point Checklist

EPS YoY growth (ttm) ≥ +25%
- What it is: Compare trailing-12-month earnings per share to the prior year. A 25% jump is strong momentum.
- Why it matters: Rapid earnings growth often attracts investors, supports higher valuations, and can reflect genuine business improvement.
- How to use: Favor businesses with acceleration driven by sustainable drivers (new products, market expansion, operating leverage), not one-offs (asset sales, tax changes).
EPS 3-year CAGR ≥ +15%
- What it is: The average annual rate at which EPS grew over three years.
- Why it matters: Compounders matter. One great quarter doesn’t make a trend; multi-year growth suggests a durable engine.
- How to use: Confirm consistency. If growth is lumpy, understand the reasons. Pair with margin and cash flow checks to validate quality.
Sales 3-year CAGR ≥ +10%
- What it is: The average annual growth in revenue over three years.
- Why it matters: Sales growth is the fuel for future earnings. Quality growth usually shows up in both sales and profits.
- How to use: Cross-check with customer metrics (ARPU, churn, unit growth) if available. If sales grow but margins collapse, scrutinize the model.
Gross margin trend ≥ 0 pp (flat or rising)
- What it is: Current gross margin minus last year’s. Non-negative means stability or improvement.
- Why it matters: Gross margin reflects pricing power and cost control at the product level.
- How to use: Rising GM suggests better mix or cost efficiencies. Falling GM could be promotional pressure, input cost spikes, or competitive issues.
Operating margin trend (EBIT%) ≥ +1 pp
- What it is: Year-over-year change in operating margin.
- Why it matters: Operating improvements indicate scaling efficiency and managerial discipline.
- How to use: Ensure Opex growth isn’t outpacing revenue without good reason. Temporary dips for smart reinvestment can be okay if #20 shows leverage forming.
ROIC ≥ 15%
- What it is: Net operating profit after tax divided by invested capital.
- Why it matters: High ROIC businesses create more value per dollar invested, often signaling real moats.
- How to use: Prefer stable or rising ROIC. Be wary of accounting quirks. If ROIC is high but shrinking, investigate competition or saturation.
ROE ≥ 15% with Debt/Equity ≤ 1.5
- What it is: Returns to equity holders, with a cap on leverage.
- Why it matters: High ROE funded by modest debt is a quality sign. High ROE with high debt can be fragile.
- How to use: Cross-check with interest coverage (#10). If ROE is boosted by buybacks, ensure the business quality supports it.
FCF margin ≥ 5%
- What it is: Free cash flow divided by sales.
- Why it matters: Cash is freedom. FCF funds growth, dividends, buybacks, and debt reduction without outside financing.
- How to use: Look for consistent positive FCF. Negative FCF can be okay for early-stage growth, but pair with #3 and #20 to validate.
Cash conversion (CFO / Net Income) ≥ 1.0×
- What it is: How well accounting profits turn into cash flow.
- Why it matters: Earnings without cash are fragile. Healthy businesses collect cash from customers efficiently.
- How to use: Watch trends. A dip below 1 for a year isn’t fatal; persistent weakness is a red flag.
Interest coverage (EBIT / Interest) ≥ 4×
- What it is: How easily operating profits cover interest costs.
- Why it matters: Debt risk is often underestimated until stress hits. Coverage creates breathing room.
- How to use: Tight coverage in cyclical sectors is risky. Prefer higher buffers for companies with volatile earnings.
Net debt / EBITDA ≤ 2× (or net cash)
- What it is: Leverage ratio after subtracting cash.
- Why it matters: Lower leverage reduces the odds of dilution, distress, or forced asset sales in downturns.
- How to use: Be stricter with cyclical or declining businesses; you can be more flexible with stable, utility-like firms.
Asset-turnover trend rising
- What it is: Sales divided by total assets is improving year over year.
- Why it matters: Better utilization of assets often signals operational excellence and scaling benefits.
- How to use: Combine with margin checks. A model that improves both margins and asset turnover is rare and valuable.
Shares outstanding: dilution ≤ 2% (or shrinking)
- What it is: The company isn’t issuing a lot of new shares (or is buying back shares).
- Why it matters: Dilution shrinks your slice of the pie. Frequent issuance can mask weak cash flow.
- How to use: Some stock comp is normal, especially in tech; just ensure it’s not excessive and is tied to real value creation.
Quick Profit & Cash Health: pass ≥ 2 of 3
- What it is: Three green flags—positive net income, positive CFO, and CFO ≥ net income.
- Why it matters: Simple proxies for healthy operations and clean accounting.
- How to use: A quick triage tool. If it fails two or more, proceed with caution or require a clear, compelling thesis.
Current Ratio ≥ 1.5×
- What it is: Short-term assets vs. short-term liabilities.
- Why it matters: Liquidity avoids crisis. Companies with thin cushions can stumble on small shocks.
- How to use: Inventory-heavy businesses may need higher thresholds. Service businesses can run leaner.
Quality-of-Earnings Lite: two conditions true
- What it is: (i) Receivables growth not outpacing sales by >5 percentage points; (ii) Accruals ≤ 10% of assets.
- Why it matters: Flags potential aggressive revenue recognition and accounting-driven profits.
- How to use: If tripped, dig deeper into revenue recognition, customer concentration, and auditor commentary.
Earnings Yield (EBIT / EV) ≥ 8% or top 30%
- What it is: Operating profit relative to total firm value.
- Why it matters: A crude but effective gauge of “cheapness” on core earnings power.
- How to use: The higher, the better—subject to quality screens. Deep cyclicals can look cheap at the top; be mindful of where you are in the cycle.
EV/EBIT ≤ 12× (or bottom 30%)
- What it is: The inverse of #17.
- Why it matters: Another way to ensure you don’t overpay for operating earnings.
- How to use: Combine with #6 (ROIC) to mimic Magic Formula thinking.
PEG ≤ 1.5 (≤ 1 ideal)
- What it is: Price/Earnings divided by growth rate.
- Why it matters: Screens for fair pricing of growth.
- How to use: Works best for steady growers. Be careful with low-quality earnings or early-stage reinvestors.
Reinvestment ≥ 8% of sales and SG&A% falling over 3 years
- What it is: The company invests meaningfully (R&D + Capex) while achieving operating leverage (overhead as a percentage of sales declines).
- Why it matters: Signals a potentially durable flywheel—growing while getting more efficient.
- How to use: Pairs with CTS/SES. A powerful marker for businesses that win more as they get bigger.

A Practical Workflow: From Idea to Decision

Step 1 — Build a universe
- Start with a sector you understand or a list of companies you already admire as customers.
- Use a basic screener (market cap > X, revenue growth > Y, positive FCF, etc.) to narrow the list.
Step 2 — Run the 20-point checklist
- Apply the table mechanically. Record pass/fail for each item. Don’t rationalize marginal fails yet—just note them.
- Highlight names that pass, say, 12 or more items, or have exceptional strength where it matters for your strategy.
Step 3 — Choose the right lenses (the models)
- Growth leaders: CAN SLIM + VCP + SEPA.
- Quality at fair price: GARP + Magic Formula + 4Ms.
- Deep value: F-Score + AM + NCAV (with diversification).
- Durable compounding: CTS + SES + 4Ms.
Step 4 — Qualitative research
- Read the latest annual report and shareholder letter. Understand revenue drivers, customer value, and the competitive edge.
- Listen to at least the last two earnings calls. Note management’s capital allocation choices and transparency.
Step 5 — Decide and size
- If everything lines up, initiate a position sized conservatively (e.g., 2–5%).
- If you’re using SEPA/VCP for timing, wait for your entry signal and place a stop before buying.
Step 6 — Monitor with intention
- Track a short list of “thesis-breakers” (e.g., growth slows below threshold, leverage climbs, dilution spikes).
- Recheck the checklist quarterly. Don’t overtrade on noise; act when fundamentals change.

Common Mistakes and How to Avoid Them

Overfitting the checklist: Tweaking thresholds until a favorite stock “passes.” Keep them stable; change only with a rationale.
Confusing story with substance: A great narrative without cash flow, margins, or ROIC is a hope trade. Let the numbers carry their weight.
Ignoring dilution: Stock-based compensation can quietly shrink your ownership. Item #13 exists for a reason.
Over-leveraging: Debt is a fair-weather friend. Respect #10–#11, especially in cyclical names.
Buying late in the cycle: Low EV/EBIT can be a mirage at peak margins. Cross-check with multi-year averages and industry cycles.
No exit plan: Whether you’re a long-term holder or a trader, know what would make you sell—price-to-value gap closed, thesis broken, or better opportunity.

Final Thoughts and Next Steps

You don’t need to master every model to become a better investor. Start with the 20-point checklist, pick one or two models that resonate with your temperament, and iterate. Over time, you’ll develop pattern recognition: you’ll see the telltale signs of a durable compounder or a fragile story. That’s when investing starts to feel less like guessing and more like judgment.

What’s most important isn’t getting every pick right; it’s building a process that keeps you in the game, lets you learn from mistakes, and compounds your capital over years. Be patient, be curious, and be humble. The market has a way of rewarding those qualities in the long run.

Disclaimer: This article is for educational purposes only and is not financial advice. Always do your own research, consider your personal circumstances, and, if needed, consult a licensed professional.

Introduction

How to Use This Guide
The 20-Point Simple Quantitative Checklist
Why This Table Matters (and how to use it responsibly)
The Models — Timeless Frameworks You Can Actually Apply
Explaining Each Item in the 20-Point Checklist
A Practical Workflow: From Idea to Decision
Common Mistakes and How to Avoid Them
Final Thoughts and Next Steps

How to Use This Guide

Skim first, apply later. Don’t worry about memorizing every definition on the first pass. Get the feel of the models and the checklist, then come back to the details as needed.
Start with the checklist. It gives you a quantitative “first sort.” Stocks that pass a decent number of items are more likely to be worth your time.
Layer in the models. Once a stock passes the basic filters, ask: is it a CAN SLIM-type leader? Does it fit GARP? Does it exhibit SES dynamics? Use the models to understand the narrative behind the numbers.
Keep a journal. Note why a stock passed (or failed), what model lens you used, and what would make you change your mind. The best edge in markets is process plus self-awareness.

The 20-Point Simple Quantitative Checklist

#	Simple check (how to compute)	Pass rule (edit to taste)	Validates	Explanation (simple)
1	EPS YoY (ttm) = Earnings-per-Share now vs a year ago	≥ +25%	CAN SLIM, VCP, SEPA, PEG, GARP	EPS = profit per share. “ttm” = trailing-12-months. Big recent EPS growth means momentum in profits.
2	EPS 3-yr CAGR from last 4 FY EPS	≥ +15%	CAN SLIM, PEG, GARP, VCP, SEPA	CAGR = average annual growth rate. Shows steady profit growth, not a one-off.
3	Sales 3-yr CAGR from revenue	≥ +10%	CAN SLIM, GARP, VCP, SEPA, CTS, SES	Are customers buying more each year? Revenue growth is the engine for future earnings.
4	Gross margin trend = current GM% − last year	≥ 0 pp	4Ms, CAN SLIM, VCP/SEPA	Gross margin = (Sales − Cost of Goods Sold) ÷ Sales. Stable/rising means pricing power or cost control.
5	Operating margin trend = EBIT% YoY	≥ +1 pp	CAN SLIM, GARP, VCP/SEPA	EBIT = Earnings Before Interest and Taxes (profit from operations). Rising % means operations are improving.
6	ROIC ≈ NOPAT ÷ (Net PP&E + Net Working Capital)	≥ 15%	Magic Formula, 4Ms, GARP	ROIC = Return on Invested Capital. NOPAT = Net Operating Profit After Tax. High ROIC = a quality business.
7	ROE with low debt: ROE and D/E ≤ 1.5	ROE ≥ 15% & Debt/Equity ≤ 1.5	4Ms, CAN SLIM	ROE = Return on Equity. High ROE without heavy D/E (debt-to-equity) is safer quality.
8	FCF margin = (CFO − Capex) ÷ Sales	≥ 5%	4Ms, Magic Formula, GARP	FCF = Free Cash Flow; CFO = Cash Flow from Operations; Capex = Capital Expenditures. Cash left after upkeep/growth.
9	Cash conversion = CFO ÷ Net Income	≥ 1.0×	4Ms	Do accounting profits turn into cash? ≥1.0× means cash is keeping up with reported earnings.
10	Interest cover = EBIT ÷ Interest expense	≥ 4×	Z-style risk, 4Ms	Can operations easily pay interest? Higher multiple = lower stress.
11	Net debt / EBITDA	≤ 2.0× (or net cash)	Z-style risk, F-Score (leverage), 4Ms	Net debt = debt − cash. EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization. ≤2× = manageable debt.
12	Asset-turnover trend = Sales/Assets YoY	Rising	F-Score (ATO↑), SES	Asset turnover shows how efficiently assets generate sales. Rising = better use of resources.
13	Shares outstanding YoY	Dilution ≤ 2% (or shrinking)	CAN SLIM (S), 4Ms, AM	Fewer new shares means your slice of the pie isn’t getting watered down; buybacks help.
14	Quick Profit & Cash Health (3-in-1): (i) Net Income > 0, (ii) CFO > 0, (iii) CFO ≥ Net Income	Pass ≥ 2 of 3	Replaces Piotroski F-Score idea; 4Ms	Three easy green flags: profitable, cash-generative, and cash ≥ accounting profit.
15	Liquidity cushion (Current Ratio) = Current Assets ÷ Current Liabilities	≥ 1.5×	Replaces Altman Z-Score idea	Simple solvency snapshot: enough near-term assets (cash, receivables, inventory) to cover near-term bills.
16	Quality-of-Earnings Lite: (i) Receivables growth − Sales growth ≤ 5 pp, and (ii) Accruals ratio = (Net Income − CFO) ÷ Total Assets ≤ 10%	Both true	Replaces Beneish M-Score idea	If receivables balloon faster than sales or accruals (profits without cash) are high, be cautious.
17	Earnings Yield = EBIT ÷ EV	Top 30% or ≥ 8%	Magic Formula, AM	EV = Enterprise Value = market value of equity + debt − cash. Higher EY = cheaper for the cash profits (EBIT) you get.
18	EV/EBIT	≤ 12× (or bottom 30%)	AM, Magic Formula	Flip of #17. Lower Enterprise Value-to-EBIT means paying less for operating profits.
19	PEG = (P/E) ÷ EPS growth (3-yr)	≤ 1.5 (≤ 1.0 ideal)	PEG, GARP	P/E = Price-to-Earnings. PEG checks if the price you pay is fair for the growth you get. Lower = better value for growth.
20	Reinvestment & scale test = (R&D + Capex) ÷ Sales and SG&A% trend	Reinvest ≥ 8% & SG&A% falling 3-yr	CTS, SES	R&D = Research & Development. SG&A = Selling, General & Admin. Investing to grow while overhead % shrinks = scale advantage.

Why This Table Matters (and how to use it responsibly)

A few practical notes:

It’s not a scorecard of truth. Passing 15/20 isn’t a guarantee, and failing 10/20 doesn’t make a stock “bad.” Context matters. Young, asset-light software companies may look different from capital-heavy manufacturers. Adjust thresholds to your hunting ground.
It’s a starting line, not a finish line. Use it to filter a list down to a manageable set, then do deeper research: read annual reports, listen to earnings calls, understand the competitive dynamics.
It helps you compare apples to apples. By running several candidates through the same 20 checks, you’ll quickly see which names are strong across the board and which depend on one fragile pillar.

If you keep it simple—use the checklist for initial filtering, then layer the qualitative models—you’ll likely make faster, calmer, and more consistent decisions.

EPS YoY growth (ttm) ≥ +25%
- What it is: Compare trailing-12-month earnings per share to the prior year. A 25% jump is strong momentum.
- Why it matters: Rapid earnings growth often attracts investors, supports higher valuations, and can reflect genuine business improvement.
- How to use: Favor businesses with acceleration driven by sustainable drivers (new products, market expansion, operating leverage), not one-offs (asset sales, tax changes).
EPS 3-year CAGR ≥ +15%
- What it is: The average annual rate at which EPS grew over three years.
- Why it matters: Compounders matter. One great quarter doesn’t make a trend; multi-year growth suggests a durable engine.
- How to use: Confirm consistency. If growth is lumpy, understand the reasons. Pair with margin and cash flow checks to validate quality.
Sales 3-year CAGR ≥ +10%
- What it is: The average annual growth in revenue over three years.
- Why it matters: Sales growth is the fuel for future earnings. Quality growth usually shows up in both sales and profits.
- How to use: Cross-check with customer metrics (ARPU, churn, unit growth) if available. If sales grow but margins collapse, scrutinize the model.
Gross margin trend ≥ 0 pp (flat or rising)
- What it is: Current gross margin minus last year’s. Non-negative means stability or improvement.
- Why it matters: Gross margin reflects pricing power and cost control at the product level.
- How to use: Rising GM suggests better mix or cost efficiencies. Falling GM could be promotional pressure, input cost spikes, or competitive issues.
Operating margin trend (EBIT%) ≥ +1 pp
- What it is: Year-over-year change in operating margin.
- Why it matters: Operating improvements indicate scaling efficiency and managerial discipline.
- How to use: Ensure Opex growth isn’t outpacing revenue without good reason. Temporary dips for smart reinvestment can be okay if #20 shows leverage forming.
ROIC ≥ 15%
- What it is: Net operating profit after tax divided by invested capital.
- Why it matters: High ROIC businesses create more value per dollar invested, often signaling real moats.
- How to use: Prefer stable or rising ROIC. Be wary of accounting quirks. If ROIC is high but shrinking, investigate competition or saturation.
ROE ≥ 15% with Debt/Equity ≤ 1.5
- What it is: Returns to equity holders, with a cap on leverage.
- Why it matters: High ROE funded by modest debt is a quality sign. High ROE with high debt can be fragile.
- How to use: Cross-check with interest coverage (#10). If ROE is boosted by buybacks, ensure the business quality supports it.
FCF margin ≥ 5%
- What it is: Free cash flow divided by sales.
- Why it matters: Cash is freedom. FCF funds growth, dividends, buybacks, and debt reduction without outside financing.
- How to use: Look for consistent positive FCF. Negative FCF can be okay for early-stage growth, but pair with #3 and #20 to validate.
Cash conversion (CFO / Net Income) ≥ 1.0×
- What it is: How well accounting profits turn into cash flow.
- Why it matters: Earnings without cash are fragile. Healthy businesses collect cash from customers efficiently.
- How to use: Watch trends. A dip below 1 for a year isn’t fatal; persistent weakness is a red flag.
Interest coverage (EBIT / Interest) ≥ 4×
- What it is: How easily operating profits cover interest costs.
- Why it matters: Debt risk is often underestimated until stress hits. Coverage creates breathing room.
- How to use: Tight coverage in cyclical sectors is risky. Prefer higher buffers for companies with volatile earnings.
Net debt / EBITDA ≤ 2× (or net cash)
- What it is: Leverage ratio after subtracting cash.
- Why it matters: Lower leverage reduces the odds of dilution, distress, or forced asset sales in downturns.
- How to use: Be stricter with cyclical or declining businesses; you can be more flexible with stable, utility-like firms.
Asset-turnover trend rising
- What it is: Sales divided by total assets is improving year over year.
- Why it matters: Better utilization of assets often signals operational excellence and scaling benefits.
- How to use: Combine with margin checks. A model that improves both margins and asset turnover is rare and valuable.
Shares outstanding: dilution ≤ 2% (or shrinking)
- What it is: The company isn’t issuing a lot of new shares (or is buying back shares).
- Why it matters: Dilution shrinks your slice of the pie. Frequent issuance can mask weak cash flow.
- How to use: Some stock comp is normal, especially in tech; just ensure it’s not excessive and is tied to real value creation.
Quick Profit & Cash Health: pass ≥ 2 of 3
- What it is: Three green flags—positive net income, positive CFO, and CFO ≥ net income.
- Why it matters: Simple proxies for healthy operations and clean accounting.
- How to use: A quick triage tool. If it fails two or more, proceed with caution or require a clear, compelling thesis.
Current Ratio ≥ 1.5×
- What it is: Short-term assets vs. short-term liabilities.
- Why it matters: Liquidity avoids crisis. Companies with thin cushions can stumble on small shocks.
- How to use: Inventory-heavy businesses may need higher thresholds. Service businesses can run leaner.
Quality-of-Earnings Lite: two conditions true
- What it is: (i) Receivables growth not outpacing sales by >5 percentage points; (ii) Accruals ≤ 10% of assets.
- Why it matters: Flags potential aggressive revenue recognition and accounting-driven profits.
- How to use: If tripped, dig deeper into revenue recognition, customer concentration, and auditor commentary.
Earnings Yield (EBIT / EV) ≥ 8% or top 30%
- What it is: Operating profit relative to total firm value.
- Why it matters: A crude but effective gauge of “cheapness” on core earnings power.
- How to use: The higher, the better—subject to quality screens. Deep cyclicals can look cheap at the top; be mindful of where you are in the cycle.
EV/EBIT ≤ 12× (or bottom 30%)
- What it is: The inverse of #17.
- Why it matters: Another way to ensure you don’t overpay for operating earnings.
- How to use: Combine with #6 (ROIC) to mimic Magic Formula thinking.
PEG ≤ 1.5 (≤ 1 ideal)
- What it is: Price/Earnings divided by growth rate.
- Why it matters: Screens for fair pricing of growth.
- How to use: Works best for steady growers. Be careful with low-quality earnings or early-stage reinvestors.
Reinvestment ≥ 8% of sales and SG&A% falling over 3 years
- What it is: The company invests meaningfully (R&D + Capex) while achieving operating leverage (overhead as a percentage of sales declines).
- Why it matters: Signals a potentially durable flywheel—growing while getting more efficient.
- How to use: Pairs with CTS/SES. A powerful marker for businesses that win more as they get bigger.

A Practical Workflow: From Idea to Decision

Step 1 — Build a universe
- Start with a sector you understand or a list of companies you already admire as customers.
- Use a basic screener (market cap > X, revenue growth > Y, positive FCF, etc.) to narrow the list.
Step 2 — Run the 20-point checklist
- Apply the table mechanically. Record pass/fail for each item. Don’t rationalize marginal fails yet—just note them.
- Highlight names that pass, say, 12 or more items, or have exceptional strength where it matters for your strategy.
Step 3 — Choose the right lenses (the models)
- Growth leaders: CAN SLIM + VCP + SEPA.
- Quality at fair price: GARP + Magic Formula + 4Ms.
- Deep value: F-Score + AM + NCAV (with diversification).
- Durable compounding: CTS + SES + 4Ms.
Step 4 — Qualitative research
- Read the latest annual report and shareholder letter. Understand revenue drivers, customer value, and the competitive edge.
- Listen to at least the last two earnings calls. Note management’s capital allocation choices and transparency.
Step 5 — Decide and size
- If everything lines up, initiate a position sized conservatively (e.g., 2–5%).
- If you’re using SEPA/VCP for timing, wait for your entry signal and place a stop before buying.
Step 6 — Monitor with intention
- Track a short list of “thesis-breakers” (e.g., growth slows below threshold, leverage climbs, dilution spikes).
- Recheck the checklist quarterly. Don’t overtrade on noise; act when fundamentals change.

Common Mistakes and How to Avoid Them

Overfitting the checklist: Tweaking thresholds until a favorite stock “passes.” Keep them stable; change only with a rationale.
Confusing story with substance: A great narrative without cash flow, margins, or ROIC is a hope trade. Let the numbers carry their weight.
Ignoring dilution: Stock-based compensation can quietly shrink your ownership. Item #13 exists for a reason.
Over-leveraging: Debt is a fair-weather friend. Respect #10–#11, especially in cyclical names.
Buying late in the cycle: Low EV/EBIT can be a mirage at peak margins. Cross-check with multi-year averages and industry cycles.
No exit plan: Whether you’re a long-term holder or a trader, know what would make you sell—price-to-value gap closed, thesis broken, or better opportunity.

Timeless Financial Models

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Timeless Financial Models

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