01
Profitability
ROEFormula:
Net income ÷ EquityBands
- Score 0: ROE ≤ 5%
- Linear: 5% → 25% maps 0 → 20
- Score 20: ROE ≥ 25%
Capital efficiency. Buffett's stated quality threshold is sustained ROE above 15%.
Methodology
Compounder Score™
A 0–100 quality composite calibrated for retail value investors. We publish the full formula because no-black-box is the point.
Pedigree
Inspired by Joseph Piotroski's F-Score (financial strength), Edward Altman's Z-Score (bankruptcy risk), and the Buffett/Munger framework on quality compounders at fair prices. Calibrated for the modern retail self-directed investor — different thresholds than 1968-vintage formulas, same underlying logic.
Five components, each 0–20
The total adds to 0–100. Each leg has linear bands — no magic curve-fits, no opaque weighting tricks. A weak leg drags the total; users see exactly which one.
02
Capital structure
Debt / Equity (inverse)Formula:
Long-term debt ÷ EquityBands
- Score 20: D/E ≤ 0.3 (fortress)
- Linear: 0.3 → 2.0 maps 20 → 0
- Score 0: D/E ≥ 2.0 (distressed)
Survives downturns. High leverage is one of the most consistent predictors of permanent capital loss.
03
Cash quality
FCF marginFormula:
Free cash flow ÷ RevenueBands
- Score 0: FCF margin ≤ 5%
- Linear: 5% → 25% maps 0 → 20
- Score 20: FCF margin ≥ 25%
Cash is harder to fake than earnings. Companies with strong FCF margins have optionality and survive bad years.
04
Valuation
Earnings yieldFormula:
Net income ÷ Market capBands
- Score 0: EY ≤ 3% (P/E > 33, expensive)
- Linear: 3% → 10% maps 0 → 20
- Score 20: EY ≥ 10% (P/E < 10, cheap)
The bond-equivalent of stock price. Price discipline matters even for great businesses.
05
Stability
Multi-year ROE consistencyFormula:
Coefficient of variation (stdev / mean) of ROE historyBands
- Score 20: CV ≤ 10% (very consistent)
- Linear: 10% → 80% maps 20 → 0
- Score 0: CV ≥ 80% (highly volatile)
Compounding requires consistent profitability, not one-off spikes. Most composite scores miss this leg.
Score tiers
Excellent
75–100
Solid
50–75
Mixed
25–50
Weak
0–25
What it deliberately doesn't include
- ×Growth metrics. Growth is part of the thesis, not the quality signal. A high-quality slow-grower scores higher than a low-quality hyper-grower — which matches value-investing logic.
- ×Price momentum. Momentum signals reward chasing. Antithetical to value investing.
- ×Sector adjustments (yet). Same thresholds across sectors today. A future improvement is sector-aware bands — utilities will never hit ROE 25%, banks run high D/E by design.
Why we publish this
Most quality scores in this category — GuruFocus's GF Score, Morningstar's Quantitative Rating, others — are opaque black boxes. Users see a number with no way to interrogate it. Compounder Score is the opposite by design: every component on every stock page shows its rationale, and this page documents the entire formula. If we're wrong about a band, we want you to push back.
Compounder Score is a quality signal, not a recommendation. Educational use only — not investment advice.