Value investing has a reputation for hunting cheap, unloved stocks. Its real core is simpler: buy a share as if you were buying a piece of the business, because you are. That means understanding the business, and paying less than it is worth.
Four questions get you most of the way. Each one has numbers you can check.
1. Is it a good business?
A good business earns high returns on the money invested in it, and keeps earning them. Three numbers say most of it:
- Return on invested capital (ROIC): profit after tax divided by the debt and equity the business uses. Above 15% for years on end is good; Apple’s was 95% in the year to June 2026, which is exceptional.
- Margins, and their trend: Kweichow Moutai keeps about 91 yuan of gross profit from every 100 yuan of sales. High margins that hold steady through bad years usually mean pricing power.
- Cash conversion: does profit turn into cash? Apple’s operating cash flow was 1.12 times its profit over three years. (See free cash flow explained.)
Then ask why the numbers are good, and whether a competitor could copy it. A brand, a network, high switching costs or the lowest costs in the industry can last. A temporary shortage can’t.
2. Can the balance sheet take a hit?
Every business has bad years. The question is whether a bad year is an inconvenience or a crisis.
Compare debt with cash flow: net debt that free cash flow could repay in a year or two is rarely a problem. Check whether the company can pay its short-term bills, and whether it needs to raise money. A company that funds itself by selling new shares, as Rocket Lab did in 2025 and 2026, keeps shrinking your slice of it. (How to read a balance sheet walks through Rocket Lab’s.)
3. Can you trust management?
You are handing management your money. Judge them by two things:
- Say versus do. Every quarter, managers say what they expect. Line up their guidance against what was later reported. A team that reaches what it promised quarter after quarter is telling you how it thinks.
- Capital allocation. What did they do with the cash? Reinvest it at high returns, pay dividends, buy back shares at sensible prices, or buy other companies at any price? Apple returned all of its $511.6 billion of free cash flow over five years to shareholders. Also watch stock-based pay: shares handed to staff dilute owners.
4. What does the price imply?
A great company at too high a price is a poor investment. Instead of asking “is it cheap?”, ask what the price assumes.
- Multiples: price/earnings, enterprise value/sales, compared with the company’s own history and its peers.
- FCF yield: free cash flow divided by market value. Apple’s was 2.8% in October 2026.
- Reverse DCF: the growth rate the price needs. Apple’s price assumed free cash flow growing about 13% a year for a decade.
Rocket Lab shows why this question matters. In October 2026 it was valued at 57 times its sales (enterprise value to revenue) while its free cash flow was negative. Its revenue was growing more than 50% a year, so the business may well grow into that price. But the price only works if almost everything goes right, and you should know that before you buy.
The gap between what you pay and a sober estimate of what the business is worth is your margin of safety. It is what protects you when you are wrong, and sometimes you will be.
Habits that matter as much as the analysis
- Stay within what you understand. If you can’t explain how a company makes money in two sentences, skip it.
- Write your reasons down, and what would prove you wrong. Re-read them every earnings season.
- Think in years. Prices move on news; values move on results.
- A falling price is not a reason to buy. Re-check the four questions; the business may have changed.
Do it with real data
Tuna Terminal’s company research answers these four questions on one page for any US, Hong Kong or China A-share company: returns and margins over time, the balance sheet, management’s promises against results, and valuation scenarios. Start with a public research summary, or follow the step-by-step checklist for a US stock.