Sixteen questions, drawn from Graham's framework, to answer before you buy — not after. Tap the ? under any item to learn what it means and exactly where to find the number, or print a blank copy to work through by hand.
What it's worth, decided before you look at what it costs.
In plain English: work out what the business is worth on its own merits first, then look at what it's selling for. Not the other way round.
How to actually do it: write your value estimate down — on paper, in a note, anywhere — before you open the quote page. The act of committing to a number is what stops you drifting.
Why it matters: psychologists call it anchoring. Once you've seen $52, every subsequent judgement quietly organises itself around $52, and you'll find yourself picking a growth rate that happens to justify it. Almost nobody is immune, which is why the order is a rule rather than a suggestion.
In plain English: the gap between what you think it's worth and what you pay. Worth $100, pay $70, and your margin is 30%.
How to calculate it: (value − price) ÷ value × 100. Our Graham calculator does this for you.
Why 25%: not because the discount is where your profit comes from, but because you will be wrong on a meaningful share of your decisions. The margin decides whether being wrong costs you money or merely costs you the gain you hoped for.
In plain English: redo the valuation assuming growth comes in two points lower, and two points higher, than your estimate. See whether your conclusion survives.
Where to do it: the sensitivity table on our calculator page does this automatically across a five-point range.
What you're looking for: a decision that holds up across the whole range. If the stock only looks cheap at your most optimistic assumption, you don't have a valuation — you have a hope with arithmetic attached.
In plain English: the current share price already contains the market's assumption about future growth. Your edge only exists if you think that assumption is too low.
A quick way to check: rearrange Graham's formula. If price ÷ EPS gives you the P/E the market is paying, then (P/E − 8.5) ÷ 2 is roughly the growth rate implied by that price. Compare it to your own estimate.
Graham's example: everyone in the 1940s correctly predicted air travel would boom. Traffic grew exactly as expected, and airline investors still lost money — because the growth was in the price before it was in the results.
Can this business survive being wrong about?
In plain English: everything the company will turn into cash within a year, divided by everything it owes within a year. Above 1.0 means it can cover its short-term bills from its own resources.
Where to find it: the balance sheet in the annual report (10-K), free at the SEC's EDGAR database. Divide "total current assets" by "total current liabilities". Most screeners list it directly.
Rule of thumb: above 1.5 is sound, above 2.0 conservative, below 1.0 means it relies on refinancing or asset sales to keep going — exactly what becomes hard in a downturn.
In plain English: borrowed money compared with owners' money. A ratio of 1.0 means a dollar of debt for every dollar shareholders have put in.
Where to find it: the balance sheet — total debt ÷ total shareholders' equity. Reported by every screener as "debt/equity" or "D/E".
Important caveat: banks, insurers and utilities run structurally higher leverage for legitimate reasons. Compare a company against others in its own industry, not against the whole market.
In plain English: when does the borrowed money have to be paid back, and can they pay it or roll it over?
Where to find it: search the 10-K for "maturities of long-term debt" — there's almost always a table showing amounts due in each of the next five years. Compare the near-term figures against cash on hand and annual operating cash flow.
Why it bites: companies rarely fail because they're unprofitable. They fail because a repayment falls due at a moment when nobody will lend. A profitable business with a wall of debt maturing into a credit freeze is in real danger.
In plain English: reported profit is partly a matter of judgement. Cash actually received is not. They should broadly move together over time.
Where to find it: take "net cash provided by operating activities" from the cash flow statement and divide it by "net income" from the income statement. Do it for the last three to five years.
What you want to see: a ratio around 1.0 or above, consistently. Persistently below about 0.7 — profits reported but cash not arriving — is among the most reliable early warnings of aggressive revenue recognition. One odd year can be timing; a trend rarely is.
Cheap and deteriorating is not a bargain.
In plain English: profitable every single year for a decade — not "profitable on average".
Where to find it: the "selected financial data" section of a 10-K covers five years; two filings give you ten. Financial data sites also publish long income-statement histories.
Why the strictness: averages conceal the years that would have frightened you out. A business that lost money in the last recession will very likely lose money in the next one, and that's something to know before you own it.
In plain English: annual profit as a percentage of shareholders' money in the business. ROE of 15% means each $100 of owners' capital produces $15 of profit a year.
Where to find it: net income ÷ shareholders' equity, both on the financial statements. Every screener reports it directly.
The catch to watch for: heavy borrowing shrinks the equity denominator and inflates ROE without the business being any better. Always read ROE alongside debt-to-equity — a high ROE on a heavily leveraged balance sheet is a different animal from a high ROE with no debt.
In plain English: has it paid shareholders cash every year for a decade, without cutting or suspending?
Where to find it: the investor relations section of the company's own site usually publishes complete dividend history. Data sites list it under "dividend history" — check for gaps and cuts, not just the current yield.
Why it's a quality signal: reported profit can be shaped by accounting choices; a dividend cheque cannot. The cash either exists or it doesn't.
Fair exception: some excellent businesses reinvest everything and pay nothing. That's defensible — but then verify the cash another way, through consistent free cash flow.
In plain English: why can't a well-funded competitor simply copy this and undercut them?
The usual sources: a brand customers will pay more for; costs structurally lower than rivals'; switching costs that make leaving painful; a network that gets more valuable as it grows; or regulatory and patent protection.
How to test it: look at gross margins over ten years. Durable pricing power shows up as margins that hold steady or rise. Margins grinding downward year after year mean competition is winning, whatever the story says.
Note: this is the one area where Graham himself was weakest — his framework undervalued intangible advantages, and it's the main amendment his successors made.
The part that determines results, and the part everyone skips.
The test: explain in three sentences, without jargon, who pays this company, what for, and why they'll keep doing it. If you can't, you don't understand it well enough to judge whether a low price is an opportunity or a warning.
Where to start: the "Business" section at the front of the 10-K describes operations in plain language, and the segment breakdown shows which parts actually generate the profit — often very different from what the company talks about publicly.
The point: the boundary of your competence matters more than its size. You don't need to understand everything, only to know exactly where your understanding stops.
In plain English: name the specific, observable events that would tell you the thesis has broken — before you own it and your judgement is compromised.
Make them concrete: "margins fall below X for two consecutive quarters", "the dividend is cut", "the debt-to-equity ratio passes 1.5", "they lose the contract that produces a third of revenue". Not "if things get worse".
Why it works: once you own something, every piece of bad news arrives pre-loaded with a reason to dismiss it. A list written beforehand is the only version of your judgement not yet distorted by ownership.
In plain English: if this holding went to zero tomorrow, would it change your life? If yes, it's too big.
A common convention: cap any single position at around 5% of the portfolio, giving you roughly 20 holdings at full size. Graham favoured wide diversification precisely because he expected to be wrong sometimes.
The trap: conviction feels like a reason to size up, and it's exactly backwards. The positions people size largest are the ones they're most certain about — and certainty is not correlated with being right, only with how badly it hurts when you're not.
In plain English: if you couldn't sell, and couldn't even see a price, would you still be content owning a piece of this business?
Graham's own words, from a 1972 interview: ask yourself whether, if there were no market for these shares, you'd be willing to own the company on these terms.
What a "no" tells you: that your return depends on selling to someone else at a higher price rather than on the business itself. That's speculation — legitimate, but a completely different activity with different risks, and worth knowing you've chosen it.
Work through the four sections above. The six items marked non-negotiable are the ones Graham treated as pass/fail rather than as points on a scale.
If you can't state it this briefly, you don't have one yet.
Based on: Benjamin Graham, The Intelligent Investor (revised fourth edition, 1973). Thresholds are Graham's own and are starting points rather than universal rules — capital-light, financial and cyclical businesses warrant different tests.
Disclaimer: Educational tool only. Not investment advice and not a recommendation to buy or sell any security. Automatically fetched figures come from third-party providers and may be delayed, restated or incorrect — verify against primary filings. Nothing entered here is saved, stored or transmitted. Consider consulting a licensed financial adviser before making investment decisions.
