Stock Analysis Checklist: The Five Criteria in 15 Questions

A good stock analysis checklist asks the same fifteen questions of every company before you buy: three for each of the Five Criteria (great business, durable moat, aligned management, sound balance sheet, reasonable price), each scored pass, borderline or fail. A stock needs to pass all five criteria. The checklist does not make the decision for you. It makes sure the analysis actually happens.

Most people buy stocks on a feeling: a good story, a friend’s tip, a product they like. Sometimes that works. When it fails, the reason is almost always a step they skipped.

Where this fits: this is the scorecard version of the Five Criteria. It turns the framework in A Proven Investment Strategy Built on Five Key Criteria into questions you can tick off, and it sits at the end of the step-by-step stock research process.

Why Investors Need a Checklist

Atul Gawande’s The Checklist Manifesto makes a simple point. Checklists reduce errors not by adding knowledge, but by making sure people apply the knowledge they already have. Pilots and surgeons use them because skilled people still skip steps under pressure or excitement.

Investors face the same problem. You can be smart and well read and still never look at the balance sheet, because the story is too good to risk finding a flaw. A checklist removes that option. Every question gets answered, every time.

Howard Marks recounts Charlie Munger telling him that investing is not supposed to be easy, and that anyone who finds it easy is stupid. A checklist is how you respect that difficulty.

How the Scoring Works

Each question gets one of three marks:

• Pass. Clearly meets the house threshold.
• Borderline. Close to the threshold, or the evidence is mixed.
• Fail. Clearly misses the threshold.

Then score each criterion:

• A criterion passes if all three of its questions pass, or two pass and one is borderline.
• A criterion is borderline if it has two borderlines, or one fail that you can explain with a one-off event.
• A criterion fails if it has any unexplained fail, or three borderlines.

And the stock overall:

Result	Decision
All five criteria pass	Candidate to buy, subject to the final checks below
One criterion borderline, rest pass	Buy only with a larger margin of safety (35%+ below intrinsic value)
Criteria 1 to 4 pass, price fails	Watchlist, with a target price written down
Any of criteria 1 to 4 fails, or two or more borderline	Reject

Criterion 1: Is It a Great Business?

1. Can I explain how it makes money in two sentences? Pass: you can say what it sells, to whom and why they keep paying, without jargon. Borderline: you can explain the product but not why customers stay. Fail: you need the investor presentation to explain it. “Visa earns a small fee each time a card on its network is used” passes. “Embedded API-first payment infrastructure for B2B SMEs” does not.

2. Has it earned ROIC of 15% or more for at least five years? Pass: 15%+ in every one of the last five years. Borderline: averages 15%+ but dipped below in one year. Fail: averages below 15%. Use return on invested capital rather than return on equity, because debt can flatter ROE. See Return on Invested Capital.

3. Are the profits real cash, with stable margins? Pass: free cash flow is at least 90% of net income over five years, and gross margin is stable or rising. Borderline: conversion of 75% to 90%, or margins drifting down slowly. Fail: conversion below 75%, or margins falling steadily. A falling gross margin usually means the company cannot pass on its costs.

Criterion 2: Does It Have a Durable Moat?

4. Can I name the moat source? Pass: you can name one of Pat Dorsey’s five sources (intangible assets, switching costs, network effects, cost advantage, efficient scale) and explain how it works here. Borderline: a plausible moat, but only one you can describe loosely. Fail: “they have a good brand” with no evidence of pricing power. Plenty of well-known brands have faded.

5. Did returns hold up through a downturn? Pass: ROIC stayed near or above 15% in the worst year of the last decade. Borderline: dipped below but recovered within two years. Fail: returns collapsed and stayed low. This is the evidence that separates a real moat from a good run.

6. Does it have pricing power? Pass: the company has raised prices over time without losing customers, visible in a steady or rising gross margin. Borderline: prices are flat but volumes and margins are stable. Fail: the company competes mainly on price. Buffett told the US Financial Crisis Inquiry Commission in 2010 that pricing power is the single most important decision in evaluating a business.

Criterion 3: Is Management Aligned?

7. Is the share count flat or falling over five years? Pass: flat or down. Borderline: up by less than 1% a year, with a clear reason. Fail: rising steadily through stock-based pay or share issues. Rising share count means your slice of the company shrinks. See Stock Dilution Explained.

8. Do insiders own a meaningful stake? Pass: the CEO and board own shares worth several years of their pay, bought or held rather than just granted. Borderline: modest holdings but a pay plan tied to ROIC or free cash flow per share. Fail: little ownership and pay tied to revenue or adjusted earnings. The proxy statement has the numbers.

9. Has capital been allocated well and reported honestly? Pass: over ten years, acquisitions, buybacks and dividends have earned good returns, and shareholder letters admit mistakes. Borderline: a mixed record. Fail: repeated overpriced acquisitions, buybacks at peak prices, or letters that only celebrate. Philip Fisher prized managers who speak as openly about problems as about successes. The deeper guide is How to Identify Great Management Before You Invest.

Criterion 4: Is the Balance Sheet Sound?

10. Is net debt / EBITDA 2.0x or less? Pass: 2.0x or less, or net cash. Borderline: 2.0x to 2.5x with very stable cash flows. Fail: above 2.5x. Net debt is borrowings minus cash.

11. Is interest coverage 5x or more? Pass: operating profit covers interest expense five times or more. Borderline: 3x to 5x. Fail: below 3x. A company at 5x could see profits halve and still pay its interest comfortably.

12. Does free cash flow cover the dividend, with no refinancing wall? Pass: dividends are well below free cash flow and no large debt matures in a weak position. Borderline: dividend coverage is thin in some years. Fail: the company borrows to pay the dividend, or faces a big maturity it cannot fund from cash. See Long-Term Debt Explained.

Banks, insurers and REITs need different measures. The principle does not change: the business must survive a bad year without diluting or defaulting.

Criterion 5: Is the Price Reasonable?

13. Is the free cash flow yield 5% or more? Pass: 5% or more on normalised free cash flow. Borderline: 4% to 5% for a business with clearly above-average growth. Fail: below 4%. See Price to Free Cash Flow.

14. Is the price 25% or more below a conservative intrinsic value? Pass: 25% or more below a cautious discounted cash flow estimate. Borderline: 15% to 25% below. Fail: less than 15%. Seth Klarman’s point in Margin of Safety is that you do not need a precise value, only a large enough gap to absorb your mistakes. For criterion 5, passing either question 13 or question 14 is enough, as long as the other is not a clear fail.

15. Would I be happy owning it for five years if the market closed tomorrow? Pass: your return depends on the business growing its cash flow, not on someone paying more later. Borderline: the thesis leans on a re-rating. Fail: you are really betting on a price move. This is Buffett’s test of whether you are investing or speculating.

Two Final Checks Before You Buy

Passing all fifteen questions earns the stock a place on your shortlist. Two more checks decide whether you buy.

Write the bear case. List the three most credible ways this investment could lose money permanently. Not “the stock could fall 20%”, which is volatility. Real risks are a moat eroding, hidden leverage or management acting for itself. This is Munger’s inversion. If one risk is severe and likely, walk away.

Size it so you can survive being wrong. Ask whether you could watch the stock fall 30% or go nowhere for three years without panicking. If not, the position is too big or the conviction is borrowed. Buffett has suggested imagining you had a card with only twenty punches for a lifetime of investments. You would be far more careful with each one.

Worked Example: Scoring Company B

Company B is a hypothetical maker of payroll software for small businesses.

Criterion	Question scores	Criterion result
1. Great business	Pass, Pass (ROIC 22%), Pass (FCF 105% of net income)	Pass
2. Durable moat	Pass (switching costs), Pass (ROIC 18% in recession), Borderline (prices flat)	Pass
3. Aligned management	Borderline (shares up 0.8% a year), Pass, Pass	Pass
4. Balance sheet	Pass (net cash), Pass, Pass	Pass
5. Price	Fail (FCF yield 3%), Fail (5% below value), Pass	Fail

Company B is an excellent business at the wrong price. The decision is watchlist. At the current free cash flow of $150 million, a market value of $3 billion would give a 5% yield. That is the target, written down with today’s date.

If the price later hits the target, you rerun the checklist before buying. Businesses change while you wait.

How We Use This in the Five Criteria

The fifteen questions are the Five Criteria broken into testable parts. The house thresholds are unchanged: ROIC of 15% or more for five years and free cash flow at least 90% of net income; a named moat that held through a downturn; a flat or falling share count and real insider ownership; net debt / EBITDA of 2.0x or less and interest coverage of 5x or more; and a free cash flow yield of 5% or more or a 25% margin of safety.

Always score in order. If you look at price first, a cheap stock will tempt you to excuse a weak business. The printable Five Criteria Investment Checklist has these questions laid out as a one-page scorecard.

Common Checklist Mistakes

• Skipping questions because others look great. The checklist only works if every gate is applied.
• Grading generously. If you have to argue for a pass, it is borderline.
• Using one year of data. Use five to ten years, so a cyclical peak does not flatter the result.
• Treating the checklist as the analysis. It checks your work. You still need to read the annual report.
• Changing thresholds for a stock you already like. If you adjust a rule, write down why, and apply it to every stock from then on.

For more pitfalls, see The Most Common Stock Analysis Mistakes.

Your Next Step

Download the Five Criteria Investment Checklist and score one stock you already own. Then use How to Spot a Great Business in 10 Minutes to build a shortlist worth scoring, and keep the results in your stock watchlist.

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About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.

The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.