The 50-item value-investor checklist

Can you describe the business in two sentences without using buzzwords?

Lynch's test. If you cannot explain it cleanly to a 10-year-old, you do not own it for the right reason.

Is the gross margin above 35 percent and stable over 5 years?

Gross margin durability is the cleanest single indicator of pricing power.

Is the return on invested capital above 15 percent on a 5-year average?

Below 15 percent and the business is not earning meaningful economic profit. Greenblatt and Smith both filter here.

Does the company have a documented competitive moat (network effects, switching costs, brand, scale, IP)?

Without a moat, ROIC will mean-revert. Pat Dorsey's framework is the standard classification.

Has the customer base been retained over the last 5 years (net revenue retention above 95 percent for subscription businesses)?

Retention is the canary on moat decay. Falling retention precedes falling pricing power.

Is the business growing organic revenue at 5 percent or more without leverage or acquisitions?

Smith's filter. Acquisitive growth often hides organic stagnation.

Does the business require less than 5 percent of revenue in maintenance capex to keep running?

Capital-light compounders beat capital-heavy ones over decades. Capex / revenue is the proxy.

Is the business model resilient to recession (consumer staple, software, regulated utility, defense)?

Cyclicals can compound but require timing that few investors execute. Recession resilience is a tilt, not a rule.

Is there pricing power demonstrated by historical price increases without volume loss?

Real pricing power shows up in CPI-plus pricing over multiple cycles. Tell-tale: cigarettes, soda, premium spirits.

Would you be comfortable owning this business if the stock market closed for 5 years?

Buffett's framing. If the answer is no, the business quality is not what you think.

Is interest-bearing debt less than 40 percent of market capitalization?

Graham's classic threshold. AAOIFI Sharia uses 33 percent for halal compliance.

Is interest coverage (EBIT / interest expense) above 5x?

Below 5x and the company is structurally exposed to rate cycles or downturns.

Is the current ratio above 1.5?

Short-term liquidity. Current assets need to comfortably cover current liabilities.

Is free cash flow positive in 4 of the last 5 years?

Periodic negative FCF is fine for growth investments; chronic negative FCF is a red flag.

Are working capital trends sustainable (DSO, DIO, DPO not deteriorating)?

Quietly stretching payment terms or losing collections speed is an early warning sign.

Is the cash conversion cycle below 60 days for service businesses, or stable for product businesses?

Cash velocity matters. Berkshire's float-driven businesses run negative cash cycles.

Are tangible book value and intrinsic value moving in the same direction?

Diverging TBV and IV is a sign that intangibles (goodwill, brand) are doing the heavy lifting. Not bad, but worth a deeper look.

Is the share count flat or declining over 5 years (excluding strategic acquisitions)?

Persistent dilution is a quiet wealth transfer from existing shareholders.

Is the dividend (if any) covered by free cash flow at least 1.5x?

Uncovered dividends get cut. Pre-cut, the stock price reflects the dividend assumption.

Does the business have a working Altman Z-Score above 3.0 or Piotroski F-Score above 7?

Distress predictors. Both are documented to predict bankruptcy and equity drawdowns.

Is the PE ratio below the sector median, or justified by superior growth?

Context matters. PE 15 in utilities vs PE 15 in software are different trades.

Is the EV/EBIT below 15?

Greenblatt's Magic Formula uses this. Below 10 is clearly cheap; above 25 needs serious justification.

Is the free cash flow yield above 5 percent?

FCF yield is the most honest valuation ratio. Above 5 percent is attractive; above 8 percent is rare and special.

Is the PEG ratio below 1.5?

Lynch's GARP ratio. Pays less than 1.5 years of growth for a year of growth.

Is the price below intrinsic value with a 30 percent margin of safety?

Graham's standard. Below the cushion, valuation work is irrelevant because there is no cushion.

Have you triangulated intrinsic value across multiple methods (DCF, comparables, asset-based)?

Single-method valuation is fragile. Three independent estimates that converge is the signal.

Is the stock trading below its 5-year average valuation (PE, EV/EBITDA, FCF yield)?

Mean reversion is a tailwind when starting cheap and a headwind when starting expensive.

Are forward earnings estimates conservative (you would underwrite to lower numbers)?

Analyst estimates are systematically optimistic. Build your model on numbers you can defend.

Does the stock pass a simple Graham Number test (sqrt of 22.5 times EPS times BVPS)?

Graham's defensive-investor formula. A useful sanity check, not a sufficient test.

Is there a credible bull case AND a credible bear case at this price?

If only one case exists, you have not done the homework.

Has the CEO been in seat for 5+ years?

Continuity matters. Frequent turnover destroys compounding.

Does management own equity (insider ownership above 1 percent)?

Skin in the game. Insider buys at market price are the highest-signal version.

Is executive compensation reasonable as a percentage of net income?

Excessive comp signals self-dealing. Compare to sector peers.

Has management hit its prior 5-year forecasts (or explained misses honestly)?

Documented track record on forecasts is the cleanest competence signal.

Are share buybacks done at prices below estimated intrinsic value?

Buybacks at premium prices destroy value. Buffett has written this annually since 1984.

Are M&A deals accretive within 2 years (ROIC on deal above the cost of capital)?

Acquisition-led growth often dilutes returns. Track record on deals matters.

Is the capital allocation history coherent (dividends, buybacks, M&A, organic capex weighted appropriately)?

Capital allocation is the single most important CEO skill. Most CEOs are terrible at it.

Are shareholder letters honest about mistakes and risks?

Read 5 years of letters. If the tone is uniformly positive, that is the red flag.

Has the board pushed back on management when needed (governance signal)?

A rubber-stamp board is worse than no board. Look for documented disagreement.

Would you trust this CEO with your money personally (the Munger test)?

If the answer is no, do not own the stock. Munger has not bent on this rule in 60 years.

Has the company restated earnings in the last 5 years?

Restatements are rare and almost always indicate accounting problems. Treat as a near-veto.

Are there active SEC investigations or major class-action lawsuits?

Litigation creates fat-tail risk that is hard to value. Avoid unless the discount is extreme.

Is auditor quality high (Big 4) and tenure stable?

Auditor changes mid-cycle are a red flag. Boutique auditors on large companies are too.

Is the cash flow statement reconciling cleanly with the income statement?

Persistent gaps between reported earnings and cash flow indicate aggressive accounting.

Are accruals growing faster than revenue?

The Sloan accruals anomaly. High accruals predict earnings reversals.

Has insider selling been heavy in the last 12 months (above normal RSU vesting)?

Concentrated insider selling often precedes bad news. Watch the Form 4 filings.

Is the customer base concentrated (top 10 customers above 30 percent of revenue)?

Concentration risk. One lost contract can devastate the business.

Is the supplier base concentrated (single supplier risk for critical inputs)?

Mirror image of customer concentration. Often hidden in 10-K footnotes.

Is the business secularly declining (newspapers, retail department stores, cable TV)?

Cheap secular declines are value traps. Be skeptical of cheap if the industry is shrinking.

Does the management team have a documented history of fraud or related-party transactions?

Pattern-match. People rarely change. Walk away.