The seven questions that decide whether a company is worth owning, in the order they should be asked.
Most people analyse stocks backwards. They start with the price, decide whether it looks cheap, then work out whether the business deserves owning. Do it in that order and valuation drives the thesis instead of testing it. These seven questions work in sequence, and each one changes how you answer the next.
Before any ratio, answer in one sentence what the company sells, to whom, and how it gets paid. Then check the revenue split by segment and by geography. If you cannot explain the business simply, no amount of financial analysis will rescue the decision.
Companies move through launch, growth, shakeout, maturity and decline, and the metrics that matter change completely at each stage. Judging a hyper-growth company on profitability, or a mature one on revenue growth, is the single most common analytical error. Establish the phase before you judge any number.
Ask why a well-funded competitor cannot take these customers. Look for network effects, switching costs, cost advantages, intangibles or efficient scale. Then check the evidence: stable or expanding gross margins through cost inflation is the clearest sign pricing power actually exists.
Read what management said three years ago and compare it to what happened. Check insider ownership, how they spend free cash flow, and whether share count is rising. Skilled operators who allocate capital badly still destroy value.
Growth without returns consumes cash; returns without growth stagnate. Look at revenue growth alongside ROIC, and check whether margins expand as the company scales. Operating leverage that works in your favour is one of the strongest signals in investing.
List the three things that would make you wrong: customer concentration, debt with weak interest coverage, regulatory exposure, technology shift, dilution. Writing them down now is what lets you tell a broken thesis from a falling price later.
Use several methods rather than one. Trailing multiples for context, a discounted cash flow for rigour, and a reverse DCF to see what growth the current price already assumes. That last one converts an unanswerable question into a checkable one: are those expectations reasonable?
Stock Simplifier walks you through these steps for any stock, filling in real data at every one and explaining each concept as it comes up. You review it, score it, and reach your own conclusion. Every analysis is saved so you can check later whether your thesis still holds.
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