The Big Five growth metrics

Before asking what a company is worth, we ask a more fundamental question: is this a good business? The Big Five metrics answer that by measuring how fast five key financial numbers have compounded over the past decade.

The five metrics

1. Earnings per share (EPS). The profit earned per share each year. Growing EPS is the most direct driver of long-term stock price appreciation — all else equal, a company earning more per share should be worth more per share.

2. Book value per share (BVPS). The net worth of the company on paper, per share. Growing BVPS shows the company is retaining and compounding the equity it earns, not just cycling earnings through dividends or buybacks that leave no lasting value.

3. Revenue. Total sales. Growing revenue is necessary — though not sufficient — for growing earnings. A company growing earnings solely by cutting costs is eventually going to run out of costs to cut.

4. Free cash flow (FCF). Cash generated after running and maintaining the business. This is the "real" earnings figure, the hardest to manipulate. Growing FCF shows the business model is genuinely cash-generative, not just profitable on paper.

5. Return on invested capital (ROIC). How efficiently the business converts invested capital into profit. This is the most important single metric. A company growing at 20% per year while destroying capital is not a good investment.

The 10% threshold

Each metric needs to have grown at 10% per year or more, on average, over the past decade. Why 10%? It's a threshold that historically separates businesses that genuinely compound wealth from those that merely keep pace with inflation and cost of capital. At 10% annual growth, a metric roughly doubles every 7 years.

What if some metrics fail?

Passing all five is rare and signals an exceptional business. Most well-run companies pass 3 or 4. Passing fewer than 3 warrants closer scrutiny before investing. Context always matters: one or two failing metrics might reflect a structural issue, or they might reflect a temporary circumstance that the other metrics and your qualitative research can explain.