In investing, success often comes more from avoiding poor decisions than from catching short-term trends. Many investors buy companies that look promising on the surface only to later discover weak cash flows, high debt, or falling promoter confidence.
A structured, data-driven approach can prevent these mistakes. With modern stock screening tools like Finology Ticker, you can quickly evaluate a company’s fundamentals, track multi-year performance, and focus only on the stocks that meet strict quality filters.
Here are five essential checks every investor should perform before buying a stock.
1. Is the Business Growing Consistently?
Growth is the clearest sign of a healthy business. A company steadily increasing its sales and profits over time is likely expanding its market presence and maintaining strong demand for its products.
What to look for:
- Sales and net profit growth (CAGR) of at least 15% over the last 3-5 years
- Consistent quarterly growth even during sector slowdowns
Why it matters:
Flat or inconsistent growth signals saturation or poor execution.
Example:
In FY25, Tata Elxsi reported a 5-year revenue CAGR of 18% and a net profit CAGR of 25%, driven by strong demand in auto and healthcare tech segments. In contrast, Tech Mahindra’s revenue CAGR stood below 10%, reflecting slower transformation growth.
Using Finology Ticker’s “Ratios” tab, you can view 3-year and 5-year CAGR data for sales and profits of any listed company to identify long-term outperformers instantly.
2. Is the Company Generating Real Cash?
Profits on paper don’t always translate to cash in hand. Companies often show accounting profits while struggling to collect payments or manage working capital.
The Free Cash Flow (FCF) metric reveals whether the business is actually generating money after all expenses.
What to look for:
- Positive and growing FCF for at least three consecutive years
- FCF conversion ratio (FCF/Net Profit) above 70%
Why it matters:
A strong FCF indicates genuine profitability, while a negative FCF despite rising profits can expose liquidity stress.
Example:
Between FY21-FY25, Infosys generated cumulative free cash flow exceeding ₹90,000 crore, maintaining over 90% conversion of net profit to cash. In contrast, several midcap infrastructure firms, such as IRB Infrastructure, posted negative FCF despite reported profits, due to heavy capital expenditure cycles.
Ticker’s Cash Flow statement tab lets you analyse such patterns year-by-year, helping you differentiate real cash generators from accounting-driven profits.
3. Is the Company’s Debt Under Control?
Debt can amplify growth, but it can also destroy shareholder value if mismanaged. The Debt-to-Equity (D/E) and Interest Coverage Ratio (ICR) are critical indicators of financial stability.
What to look for:
- D/E ratio below 1 for most industries
- ICR above 3 (earnings at least 3x interest expense)
Why it matters:
High debt increases vulnerability to interest rate changes or business slowdowns.
Example:
In FY25, Hindustan Zinc reported a D/E of 0.01 and an ICR above 60, reflecting a near debt-free balance sheet. Conversely, Vodafone Idea’s debt exceeded ₹2.2 lakh crore, with an ICR below 1, highlighting severe repayment risk.
Ticker’s Financial Ratios section helps you quickly check these leverage metrics for any stock, flagging companies that might face solvency pressures during downturns.
4. How Efficiently Is the Company Using Its Capital?
A great business doesn’t just grow; it uses its capital efficiently. Return on Capital Employed (ROCE) and Return on Equity (ROE) measure profitability relative to the capital invested.
What to look for:
- ROCE consistently above 15% over three years
- ROE stable and rising, not volatile
Why it matters:
High returns reflect efficient capital allocation and strong competitive advantages, traits of long-term wealth creators.
Example:
Asian Paints and Pidilite Industries have maintained ROCE above 25% and ROE around 20% for over a decade. Their ability to generate superior returns with minimal debt and consistent reinvestment makes them benchmark compounders.
In contrast, Tata Steel’s ROCE dropped below 10% in FY25 due to declining margins and high input costs, reminding investors that cyclical sectors can be capital-intensive.
Ticker’s “Efficiency” and “Profitability” ratios let you visualise multi-year ROCE/ROE trends, enabling quick comparison between peers.
5. What Does the Shareholding Pattern Reveal?
Ownership tells a story: who controls the company, who’s exiting, and who’s entering.
What to look for:
- Promoter holding above 30-40% (shows commitment)
- Low promoter pledging (preferably below 10%)
- Rising institutional (FII/DII) stake quarter-on-quarter
Why it matters:
A healthy shareholding structure signals stability and trust in management.
Example:
In FY25, Dixon Technologies maintained promoter holding near 34% with zero pledging, while FIIs increased stake from 16.8% to 19.4% reflecting strong institutional confidence.
On the other hand, Zee Entertainment’s high promoter pledging (over 90% in 2019) led to forced share sales and massive value erosion for retail investors.
Finology Ticker’s Shareholding tab provides a clear quarter-by-quarter view of promoter, FII, and DII activity, helping you track shifts before the market reacts.
Putting It All Together with a Screener
Manually checking every company is tedious, but with a custom screener, it takes seconds. Using the best free screener of Finology Ticker, investors can combine multiple filters and get their desired result in seconds.
Here’s a query you can paste in Finology Ticker Screener:
Net sales 3yr CAGR > 15 AND Net Profit 3yr CAGR > 15 AND Debt to Equity Y1 < 1 AND Interest Coverage Y1 > 3 AND ROE 3yr Avg > 15 AND ROCE 3yr Avg > 15 AND Promoter Holding Q1 > 30 AND Promoter Pledging Q1 < 10 AND FII Holding Q1 >FII Holding Q2 AND DII Holding Q1 >DII Holding Q2
This instantly narrows India’s 6,000+ listed companies to a small universe of fundamentally strong, cash-generating, low-debt businesses.
Final Thoughts: A Disciplined Approach to Wealth Creation
Successful investing isn’t about predicting the next market rally. It’s about consistently applying filters that protect you from poor-quality businesses.
By combining these five essential checks: growth, cash generation, debt control, efficiency, and ownership, you can build a portfolio rooted in financial strength rather than speculation.
Finology Ticker simplifies this disciplined approach, providing investors with access to reliable financial data, trend visualisations, and screening tools, which help you make decisions backed by fundamentals, not emotions.
In the long run, it’s not about timing the market; it’s about identifying businesses that compound steadily. And that journey starts with asking the right five questions before every investment.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
