Resources

Methodology

How a company goes from a first screen to the Ready-to-Buy Watchlist, what The Compounder Score measures, and how to read the result.

From screen to watchlist: the five-step process

1
Screen
We screen for revenue growth above 10%, rising margins, a robust balance sheet and an improving return on capital employed (ROCE).We start by screening for companies with revenue growth above 10%, rising net and free cash flow margins, a robust balance sheet (total assets well above total liabilities) and an improving return on capital employed (ROCE).
2
Score
Each company that passes is scored against the 22-point framework below, giving a single score out of 22.Each company that passes is evaluated against every criterion of the 22-point framework below, as objectively as possible, producing a single score out of 22.
3
Decide
Scores of 19 or above (Best-in-Class) go straight to a Deep Dive. High Conviction companies can also get one when we see potential.Companies scoring 19 or above (Best-in-Class) pass automatically to a Deep Dive. High Conviction companies can also receive one when we see potential, for example when an early-stage company ranks below 19 only because it is not yet profitable or its ROCE is still negative.
4
Deep Dive
A much deeper analysis: the business and its competition, financials, valuation (DCF, multiples) and, if still attractive, a positioning strategy.A much more in-depth analysis: the business and its competition, a financial review, a valuation analysis (DCF, multiples and more) and, if the stock is still attractive, a positioning strategy.
5
Ready-to-Buy Watchlist
Companies that stay attractive join the Watchlist. You get alerts when prices reach the entry levels from our valuation work.Companies that remain attractive join the Ready-to-Buy Watchlist. The platform monitors prices against the entry levels from the valuation work and sends alerts when they are reached, so decisions follow a plan instead of emotion.

The 22-point framework

Seventeen scored criteria across six categories are worth a maximum of 22 points. A seventh category, Red Flags and Risks, subtracts points for risks that the other criteria can miss. Quantitative criteria show the benchmark they are measured against.

1. Management Importance · 3 points

"Skin in the Game" and Incentives

Points2Benchmark> 10.0%

What we assess

Whether insiders own a meaningful stake and how much of their pay comes from stock and options.

Business Resilience to Management

Points1

What we assess

Whether the business could keep compounding through a change of CEO, based on leadership history and how much it depends on one person.

Criterion	Points	What we assess	Benchmark
"Skin in the Game" and Incentives	2	Whether insiders own a meaningful stake and how much of their pay comes from stock and options.	> 10.0%
Business Resilience to Management	1	Whether the business could keep compounding through a change of CEO, based on leadership history and how much it depends on one person.	—

2. Market Dynamics · 2 points

Large and Growing TAM

Points1

What we assess

How large the addressable market is relative to the company’s current size, i.e. how much room is left to grow.

Exposure to Secular Trends

Points1

What we assess

Whether long-lasting structural trends, such as ageing populations or digitalisation, work in the company’s favour.

Criterion	Points	What we assess	Benchmark
Large and Growing TAM	1	How large the addressable market is relative to the company’s current size, i.e. how much room is left to grow.	—
Exposure to Secular Trends	1	Whether long-lasting structural trends, such as ageing populations or digitalisation, work in the company’s favour.	—

3. Business Model · 4 points

Asset-Light Model

Points1Benchmark< 5.0%

What we assess

Capital expenditure as a share of revenue: how much capital the business needs to keep growing.

High Portion of Recurring Revenue

Points1Benchmark> 80.0%

What we assess

The share of revenue that repeats, such as subscriptions and consumables, rather than one-off sales.

Margin Stability / Growth

Points2Benchmark> 10.0%

What we assess

The trend in net margin: stable or expanding margins are rewarded.

Criterion	Points	What we assess	Benchmark
Asset-Light Model	1	Capital expenditure as a share of revenue: how much capital the business needs to keep growing.	< 5.0%
High Portion of Recurring Revenue	1	The share of revenue that repeats, such as subscriptions and consumables, rather than one-off sales.	> 80.0%
Margin Stability / Growth	2	The trend in net margin: stable or expanding margins are rewarded.	> 10.0%

4. Economic Moat · 5 points

Sustainable Competitive Advantage

Points2

What we assess

What protects the business from competitors, such as switching costs, intangible assets, network effects or scale, and how durable that protection is.

Pricing Power

Points1

What we assess

Whether the company can raise prices faster than inflation without losing customers.

Dominant or Disruptive Position

Points1

What we assess

Whether it leads its market, or is a disruptor taking share from incumbents.

Embedded in Customer Behavior

Points1

What we assess

How deeply it is embedded in customers’ daily operations: a need-to-have, not a nice-to-have.

Criterion	Points	What we assess	Benchmark
Sustainable Competitive Advantage	2	What protects the business from competitors, such as switching costs, intangible assets, network effects or scale, and how durable that protection is.	—
Pricing Power	1	Whether the company can raise prices faster than inflation without losing customers.	—
Dominant or Disruptive Position	1	Whether it leads its market, or is a disruptor taking share from incumbents.	—
Embedded in Customer Behavior	1	How deeply it is embedded in customers’ daily operations: a need-to-have, not a nice-to-have.	—

5. Financial Analysis · 4 points

ROCE

Points2Benchmark> 15.0%

What we assess

Return on capital employed, calculated as EBIT ÷ (Total Assets − Current Liabilities), against a 15% benchmark, plus whether it is improving.

Free Cash Flow Consistency

Points1

What we assess

Whether free cash flow is positive, predictable and growing.

Benchmark

> $0M (FCF Positive)

Resilience & Cyclicality

Points1

What we assess

How well revenue and cash flow hold up in an economic downturn.

Criterion	Points	What we assess	Benchmark
ROCE	2	Return on capital employed, calculated as EBIT ÷ (Total Assets − Current Liabilities), against a 15% benchmark, plus whether it is improving.	> 15.0%
Free Cash Flow Consistency	1	Whether free cash flow is positive, predictable and growing.	> $0M (FCF Positive)
Resilience & Cyclicality	1	How well revenue and cash flow hold up in an economic downturn.	—

6. Growth and Profitability · 4 points

Sustainable Double-Digit Growth

Points1Benchmark> 10.0%

What we assess

Expected revenue growth over the coming years, based on analyst estimates, against the 10% benchmark.

Growth Levers

Points1

What we assess

Whether there are clear, achievable ways to keep growing, such as new products, adjacent markets or international expansion.

Pathway to Profitability

Points2

What we assess

Whether the company is profitable, or visibly heading there as margins improve.

Benchmark

> $0M (Net Income Positive)

Criterion	Points	What we assess	Benchmark
Sustainable Double-Digit Growth	1	Expected revenue growth over the coming years, based on analyst estimates, against the 10% benchmark.	> 10.0%
Growth Levers	1	Whether there are clear, achievable ways to keep growing, such as new products, adjacent markets or international expansion.	—
Pathway to Profitability	2	Whether the company is profitable, or visibly heading there as margins improve.	> $0M (Net Income Positive)

7. Red Flags and Risks · subtracts up to 6 points

Balance Sheet Risk

Pointsup to −2Benchmark> 1.5x

What we assess

Balance-sheet strength: how comfortably total assets cover total liabilities.

Regulatory & Geopolitical Risk

Pointsup to −1

What we assess

Exposure to regulation or geopolitical events that could hurt the business.

Core Business Disruption

Pointsup to −1

What we assess

The risk that competition or technology undermines the core business.

Customer Concentration Risk

Pointsup to −1

What we assess

Dependence on a small number of customers.

Share Dilution

Pointsup to −1Benchmark< 2.0% CAGR

What we assess

How fast the share count is growing, for example from stock-based compensation.

Criterion	Points	What we assess	Benchmark
Balance Sheet Risk	up to −2	Balance-sheet strength: how comfortably total assets cover total liabilities.	> 1.5x
Regulatory & Geopolitical Risk	up to −1	Exposure to regulation or geopolitical events that could hurt the business.	—
Core Business Disruption	up to −1	The risk that competition or technology undermines the core business.	—
Customer Concentration Risk	up to −1	Dependence on a small number of customers.	—
Share Dilution	up to −1	How fast the share count is growing, for example from stock-based compensation.	< 2.0% CAGR

How points are awarded

Every criterion is scored at none, half or full points. Nothing in between, which keeps results simple and comparable across companies.
Eight measures are calculated automatically from reported financial statements: capital expenditure intensity, revenue growth, ROCE, free cash flow consistency, net margin, share dilution, balance-sheet strength and the net income trend.
The remaining criteria, such as management, moat and growth levers, are analyst judgment, written up with the reasoning behind each so you can disagree with it.
When a metric is improving but has not yet crossed its benchmark, for example ROCE climbing towards 15%, half points are the norm until it does so durably.
Red flags work in reverse: none, half or the full negative weight is subtracted from the total.

Reading the score

Scores move in half points, so a 15.5 is Viable and an 18.5 is High Conviction.

Best in Class

Score19 and above

What it means

Near-perfect fundamentals. Passes automatically to a Deep Dive.

High Conviction

Score16 to 18.5

What it means

Excellent fundamentals. May receive a Deep Dive when there is visible potential.

Viable

Score13 to 15.5

What it means

A good business with identifiable gaps, such as slower growth or a weaker return on capital.

High Risk / Pass

Score12.5 and below

What it means

Material weaknesses. A pass for now.

Tier	Score	What it means
Best in Class	19 and above	Near-perfect fundamentals. Passes automatically to a Deep Dive.
High Conviction	16 to 18.5	Excellent fundamentals. May receive a Deep Dive when there is visible potential.
Viable	13 to 15.5	A good business with identifiable gaps, such as slower growth or a weaker return on capital.
High Risk / Pass	12.5 and below	Material weaknesses. A pass for now.

A worked example: Boston Scientific (BSX)

Boston Scientific scored 15.5 out of 22, which is Viable: a profitable, resilient business held back by growth below 10%, a return on capital under the benchmark, and regulatory and competitive risks.

Management Importance

Score2Out of3

Why

Insiders own only about 0.2%, so “Skin in the Game” earned half points.

Market Dynamics

Score1.5Out of2

Why

A large market, but the company is already big relative to it.

Business Model

Score4Out of4

Why

Asset-light, highly recurring razor-and-blade revenue and rising margins.

Economic Moat

Score4Out of5

Why

Strong switching costs; pricing power and market dominance each earned half points.

Financial Analysis

Score3Out of4

Why

ROCE of about 10% is below the 15% benchmark, so half points.

Growth and Profitability

Score2.5Out of4

Why

Estimated growth of 8.5% a year is under 10%, so no points there.

Red Flags and Risks

Score−1.5

Why

Regulatory, disruption and customer-concentration risks, half a point off each.

Category	Score	Out of	Why
Management Importance	2	3	Insiders own only about 0.2%, so “Skin in the Game” earned half points.
Market Dynamics	1.5	2	A large market, but the company is already big relative to it.
Business Model	4	4	Asset-light, highly recurring razor-and-blade revenue and rising margins.
Economic Moat	4	5	Strong switching costs; pricing power and market dominance each earned half points.
Financial Analysis	3	4	ROCE of about 10% is below the 15% benchmark, so half points.
Growth and Profitability	2.5	4	Estimated growth of 8.5% a year is under 10%, so no points there.
Red Flags and Risks	−1.5	—	Regulatory, disruption and customer-concentration risks, half a point off each.

What the score is, and is not

It is a screening tool: a fast, consistent way to decide which companies deserve the time of a full analysis.
It measures business quality, not price. A great business can still be a poor investment at the wrong valuation, which is what the Deep Dive and the DCF models are for.
It is a snapshot. Scores reflect the information available at the review date shown on each score sheet.
Part of it is judgment. We explain our reasoning criterion by criterion so you can weigh it yourself.
It is not a credit rating, not personalised advice and not a recommendation to buy, hold or sell.

Questions about the method?

See the FAQs, or read the Legal Notice for the full disclaimer.