Good Companies vs Bad Companies — Stock Selection Metrics

What a strong company looks like

• Consistently growing profit — e.g. 100B, then 120B, then 150B over three years.
• Manageable debt — say debt at 30% of equity rather than 80%.
• Positive free cash flow — it earns more cash than it spends, without constant new borrowing.
• Healthy margins — net margin above ~10% is a good sign; very thin margins leave little room for error.
• Dividends where appropriate — many mature companies return 3–8% a year.

What a weak company looks like

• Falling profit or outright losses.
• High debt (say above 70% of equity), which raises the risk of trouble repaying.
• Negative free cash flow — spending more cash than it brings in.
• Very thin margins (under ~2%), which are hard to sustain.
• A "hot" story with no profit — exciting narratives priced richly carry real risk.

Two quick examples

Company A: revenue 1,000B, profit 150B (15% margin), debt 20% of equity, positive free cash flow, 5% dividend — a solid candidate.

Company B: revenue 1,000B, profit 30B (3% margin), debt 80% of equity, negative free cash flow, no dividend — one to be cautious about.

Common mistakes

• Buying the hype. Friends and videos are not a substitute for reading the filings.
• Judging one quarter. Look at the 3–5 year trend, not a single good report.
• Not comparing within an industry. Margins and debt only mean something relative to peers.

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