This is the next brick in the series. In Step 1 we set the lane and built a clean, tradable universe; in Step 2 we tighten that universe with straightforward “quality first” checks—can these businesses earn good returns, convert to cash, and carry sensible balance sheets. I’m not claiming this is the only way to invest; it’s the process I’m using because it forces clarity and helps me make informed decisions. If you see a better tweak, say so—I want this to be useful, not dogma.
I’m running the exact saved screener from Step 1 inside StockAnalysis.com (same industry, exchanges, country, primary listing, and basic liquidity) and adding quality filters on top. You can follow along with the free version; I use Stock Analysis Pro so I can save and reuse screens as the series progresses. If you decide to upgrade and use my link, I may earn a commission: https://stockanalysis.com/pro/?ref=betterinvestorproject
What Step 2 does (one line)
Keep a short list of non-negotiables, then rank everything else—so strong near-misses stay in view instead of getting cut.
Gate A — Unit economics (earn it, convert it)
Core (must pass)
- ROCE ≥ 10%
- FCF Margin ≥ 5%
- Operating Margin ≥ 0% OR FCF Margin ≥ 8% (pick one path)
- Revenue Growth 3Y ≥ 8%
Flex (score, don’t hard-cut)
- Gross Margin ≥ 55% (Software-Infra; otherwise use ≥ industry median)
- EPS Growth (soft): use EPS Growth Years ≥ 1 or EPS Growth 3Y ≥ 8% as a plus—not a gate
Nice tie-breakers for later ranking: ROCE (5Y), operating-margin trend, revenue per employee, FCF per share.
Gate B — Balance sheet (quality without fragility)
Core (must pass)
- Debt / EBITDA ≤ 3.0
- Interest Coverage ≥ 5
- Current Ratio ≥ 1.2
- Shares Change (YoY) ≤ 8% and (QoQ) ≤ 3%
Flex (score, don’t hard-cut)
- Altman Z-Score ≥ 2.5, Piotroski F-Score ≥ 5 (accounting can be noisy—treat as soft)
Hard pass red flags (still out): negative trailing FCF margin, SBC/Revenue > 20% (software), Debt/FCF > 4, Short % Float > 15% without a near-term, real catalyst.
StockAnalysis.com — exact filters to add (start from your Step-1 saved screen)
Unit economics
- Return on Capital Employed ≥ 10 (or Return on Capital (5Y) ≥ 10 if ROCE missing)
- FCF Margin ≥ 5
- Operating Margin ≥ 0 (and optionally add FCF Margin ≥ 8 if Op Margin < 0)
- Revenue Growth 3Y ≥ 8
- (Soft, optional) Gross Margin ≥ 55; EPS Growth 3Y ≥ 8 or EPS Growth Years ≥ 1
Balance sheet
- Debt / EBITDA ≤ 3.0
- Interest Coverage ≥ 5
- Current Ratio ≥ 1.2
- Shares Change (YoY) ≤ 8
- Shares Change (QoQ) ≤ 3
- (Soft, optional) Altman Z-Score ≥ 2.5, Piotroski F-Score ≥ 5
Keep Step-1 gates on: Market Cap ≥ $1B, Average Volume ≥ 300k, Dollar Volume ≥ $10M, Stock Price ≥ $5, Is Primary Listing = Yes, Exchange = NYSE/NASDAQ (AMEX only if liquid).
Save this screen: “Step 2 — Quality & Balance”
A simple quality score you’ll use in Step 3
When ranking survivors, weight the essentials; near-misses can still win on total score:
- ROCE 30%
- FCF Margin 20%
- Operating Margin 10%
- Revenue Growth 3Y 10%
- Gross Margin 10%
- Debt/EBITDA (inverse) 10%
- Interest Coverage 5%
- Dilution (YoY shares, inverse) 5%
Friendly guardrails for Step 2
Keep valuation and technicals out of this step. Don’t bend core gates, but let flex items contribute to the score. If a favorite misses a flex threshold by a hair yet crushes ROCE/FCF/leverage, keep it in Tier B and let the ranking decide.
Where we are, where we’re going
You now have a broader but still disciplined list—businesses that mostly clear quality bars, with room for near-misses to prove themselves. Next in Step 3, we’ll sanity-check valuation (mid-cycle EV/EBIT, EV/EBITDA, FCF yield—PEG only as a tie-breaker) and build a composite rank so fairly priced quality rises to the top.
Better Investor Project 