CONVICTION

Happy Investors 😃 📈 

Before you buy another growth stock, check to see if they have these 5 key metrics…

In the Watchlist Investor Reports, you’ll see all of these metrics reviewed for each company, mostly in the Core Analysis section. 

These metrics help me determine whether the business is worth a closer look. Every business I look at goes through the same screening.  If a company doesn’t clear that bar, I’m not wasting time digging into the rest.

This isn’t about catching a wave, trends, momentum or hype. It’s not about guessing where the price goes in a week or months. It’s about figuring out whether the business is structurally sound and positioned well enough to keep compounding. These five indicators will give you that signal. These fundamentals will tell you if the business is worth your time. 

You don’t need be an analyst or have a finance degree to track these. But you do need to stop relying on headlines and listening to other people tell you what to buy. Growth investing is still investing. And these five give you the clearest read on whether the engine is running as it should or needs a tune up.

These metrics don’t just get my attention; they’re also the biggest step of having conviction if they all line up. Below I’ll also talk about the how these metrics talk to each other, as opposed to working in isolation.

Here they are in no order…

#1 Cash Flow

Growing companies need as much cash as possible. If a company isn’t generating actual cash, it might not be able to cover debt, reinvest, or operate effectively.

Cash flow is the lifeblood of a company. If operations aren’t turning into real cash, that’s a red flag.

Look for businesses with consistent, rising free cash flow. That’s what funds future growth and shareholder return. 

Rule of Thumb:

*OPEX stands for operating expenses, the ongoing costs of a business through normal operations. Think (payroll, marketing, rent, R&D, software subscriptions, etc)

You really don’t want to see cash flow stagnate while costs rise. This could be a sign of over-investment or, more likely, inefficiency.

Free Cash Flow Margins

For established companies, I like seeing Free Cash Flow margins greater than 15-20%. That’s 15-20% of revenue going to Free Cash Flow.  This depends on the business and space of course.

#2 Durable Moat

Does the company have something hard to duplicate? For example, a trusted brand, scalability, unique tech, or network effects?

A great stock comes from a business with a moat. You want them to play both offense and defense.

If it can’t be easily undercut or replaced, you’ll often see stable margins, pricing power, steady growth and market share dominance.

Rule of Thumb…

#3 Revenue Growth

Is the business expanding year over year in a meaningful way?

Growth isn’t everything, but it’s damn close to everything. It’s the number one driver for a growth stock. It shows that demand exists and is likely increasing.  When a solid business is growing fast, you know they’re doing something right.

Watch out for one-time spikes. Sustainable growth should come from real scale and strong market demand, not short-term noise. You want to see consistent, organic growth, especially if it's accelerating. That’s real traction.

I like to see at least 20%+ revenue growth for at least 3 years straight, preferably speeding up, not slowing down. Meaning, trending higher more recently

Healthy growth also opens up options. It gives the business more leverage to reinvest into expansion without needing to dilute shareholders or take on new debt. And the faster it grows while maintaining or improving margins, the more powerful the compounding effect becomes.

#4 Margins

Are margins improving over time?

If revenue is up but margins are shrinking, something’s off. But if both are rising, you’re likely looking at operational efficiency or a solid business model.

Increasing margins show you're not just growing, you're getting smarter at growing.

A good sign is Gross Margins staying consistent for a long time or increasing couple percentage points for a couple years straight.

Gross, profit, and free cash flow margins are all important, but during peak growth stages, gross margins are best to track.  Once the business is established and profitable, you also want to look at profit margins and FCF margins more carefully.

#5 Balance Sheet Strength

How much cash does the company have versus its long-term debt?

A strong business with too much debt is still vulnerable, especially in today’s climate.

If the nation’s debt crisis continues to get worse, you don’t want to be holding companies that are dependent on debt. 

A solid balance sheet will be most important. A solid balance sheet gives you room to breathe and the ability to be flexible during tough times.

Look for healthy reserves and manageable debt levels. That gives the company options and flexibility.

My rule of thumb, I typically want a business with lots of cash on hand and zero to very low debt – preferably zero.

Does that mean a business is not healthy if it has 2x more cash than debt?  No, it could be very healthy depending on the business, so can 1 to 1.

But…

Higher cash-to-debt = Less Risky

Recap…

When you combine these metrics, you start to see the DNA of a potential winner. These metrics don’t work in isolation; they talk to each other. Rising margins often signal a moat forming. Strong cash flow growth strengthens the balance sheet. A healthy balance sheet gives a company room to protect its moat or weather downturns. And consistent revenue growth is what keeps all of it compounding. 

None of these factors are black-and-white, but together they paint a clear picture of whether a company’s growth is real, reputable or sustainable.  This kind of setup separates hype from long-term value.

If a stock checks all five, it’s worth a closer look.