● Free cash flow of at least $250 million.
● Net profit margin of 15% or more.
● Return on equity of at least 15% for each of the past three years and the most recent quarter.
● One dollar’s worth of shareholder equity created for every dollar of retained earnings over the past five years.
● Market capitalization of at least $500 million.
One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.
"Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because of management retained earnings, not because it did well with the capital in its hands. " ~ Warren Buffet
Warren Buffet once stated - "Unrestricted earnings should be retained only where there is a reasonable prospect - backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors." Hence for a booming business, the primary goal is to create 1$ in market for every 1$ of the retained earnings.
Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-calculation.html