Small Cap Growth Investor based on the criteria of Motley Fool

Profit Margin

Companies with a minimum trailing 12 month after tax profit margin of 7% and rising.

Relative Strength

Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising.

Compare sales and EPS growth to the same period last year

Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year.

Insider Holdings

Insider owns at least 10%.

Cash Flow from operations

Positive cash flow

Profit Margin Consistency

Profit margin must be consistent or on a rising trend

R&D as a percentage of sales

This is not that important for non-high tech and non-medical stocks. But for stocks in the high tech and medical ones, we would like to see an increase in spending on R&D to stay on the cutting edge.

Cash and Cash Equivalents

Consistent and Rising Trend

Account receivable to sales

This methodology wants to make sure that a company’s accounts receivable do not get significantly out of line with sales. It’s a warning sign if a company’s accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more.

Long-Term Debt/Equity Ratio

Reasonable debt

The FOOL Ratio (P/E to Growth)

PEG <0.5

Average Shares Outstanding

Company is not increasing the shares to dilute it. E.g. Raising capital through new shares issuance to pay off debts and not for expansion

Daily Dollar Volume

Greater than 1 million and lesser than 25 million.

Price

Not less than $7

Income Tax Percentage

Make sure that the business is paying the full rate to Uncle Sam. Due to previous earnings losses, some companies can carry forward up to a few years of tax credits. While this is a wonderful thing for them, it can cause a misrepresentation of the true bottom-line growth. If companies are paying less than 34 percent per year in taxes, you should tax their income at that rate, to see through to the real growth.

Reference: Motley Fool Investment Workbook