As a professional analyst working across proprietary trading and institutional asset management, I’m frequently asked: “Which fundamental metric should I prioritize when selecting stocks?”
The answer isn’t simple, because no single metric tells the complete story. However, there is a clear hierarchy that professional capital allocators use—and it’s different from what retail investors typically focus on.
Let me break down the institutional framework for evaluating stock fundamentals, ranked by importance.
1. Operating Cash Flow (OCF) — The Foundation of Everything
Why this ranks #1:
In institutional circles, there’s a saying: “Earnings are an opinion; cash flow is a fact.”
Operating cash flow measures the actual cash a business generates from its core operations. Unlike accounting earnings, cash flow is extremely difficult to manipulate. It tells you whether the company can:
- Pay dividends to shareholders
- Service its debt obligations
- Fund capital expenditures without external financing
- Survive economic downturns
What we look for:
- Consistent positive OCF across multiple years
- OCF growing at or faster than reported net income
- Strong free cash flow conversion (OCF minus capex)
Red flags:
- Earnings growing while OCF stagnates or declines
- Negative OCF masked by accounting adjustments
- Heavy reliance on financing activities to stay afloat
Bottom line: If a company reports strong earnings but weak cash flow, institutional investors discount the entire story. Cash generation is the ultimate validation of business quality.
2. Return on Equity (ROE) — The Quality Filter
Why this ranks #2:
ROE measures how efficiently a company converts shareholder equity into profits. High ROE signals strong management execution and competitive advantages (moats).
But here’s the catch: not all ROE is created equal.
What separates good ROE from bad:
- Good: ROE driven by operational efficiency and pricing power
- Bad: ROE inflated by excessive leverage or financial engineering
Our minimum criteria:
- ROE consistently above 18%
- ROE stable or rising over 5 years
- Supported by strong ROA (Return on Assets)
- Achieved with moderate or low debt levels
Why institutions care: High-quality companies compound shareholder wealth without taking excessive risks. Sustainable ROE expansion often drives valuation multiple expansion—which is where real alpha is generated.
3. EPS Growth (5-Year) — The Price Driver
Why this ranks #3:
At the end of the day, stock prices follow earnings per share. EPS growth is what drives share price appreciation over time.
But context matters:
Not all EPS growth is organic. Institutions adjust for:
- Share buybacks (which boost EPS mechanically without improving the business)
- One-time gains (tax benefits, asset sales, etc.)
- Dilution risks (stock-based compensation, convertible debt)
What we prefer:
- Steady, predictable EPS growth (10–20% CAGR)
- Low earnings volatility
- EPS growth aligned with cash flow growth
Key insight: EPS that grows faster than cash flow is a warning sign. It suggests accounting wizardry, not genuine value creation.
4. Net Income Growth (5-Year) — The Validation Metric
Why this ranks #4:
Net income growth is important, but it’s more of a confirmation tool than a decision driver.
The problem with net income:
- It’s heavily influenced by accounting choices
- It doesn’t account for share dilution
- It can grow while shareholder value stagnates
How we use it:
- To validate business trajectory
- To cross-check margin trends
- To ensure EPS growth isn’t just financial engineering
Net income should support the story told by cash flow and ROE—but it shouldn’t lead the analysis.
5. Revenue Growth (5-Year) — The Context Provider
Why this ranks last (but isn’t irrelevant):
Revenue growth alone tells you very little about value creation. Many companies grow revenue rapidly while destroying shareholder value.
Why revenue matters less:
- Growth without profitability is meaningless
- High revenue growth with low returns on capital destroys value
- Revenue can be inflated through acquisitions or unsustainable pricing
When revenue growth becomes critical:
- Early-stage or scaling businesses where margins haven’t matured
- Companies demonstrating operating leverage (margins expanding as they scale)
- Situations where market share gains translate into pricing power
Institutional rule: We want profitable growth, not just growth.
The Institutional Weighting Framework
Here’s how professional analysts typically weight these metrics in practice:
| Metric | Weight |
|---|---|
| Operating Cash Flow | 30% |
| ROE (5-Year Stability) | 25% |
| EPS Growth (5-Year) | 20% |
| Net Income Growth | 15% |
| Revenue Growth | 10% |
How to Calculate the Composite Score (Step-by-Step)
Now that you understand the hierarchy, here’s exactly how to calculate a weighted fundamental score for any stock:
Step 1: Gather Your Data
For each metric, calculate the 5-year CAGR (Compound Annual Growth Rate) or use the most recent value:
Formula for CAGR:
CAGR = [(Ending Value / Beginning Value)^(1/5)] - 1Example for Company XYZ:
- Operating Cash Flow CAGR (5Y): 15%
- ROE (Current): 22%
- EPS CAGR (5Y): 18%
- Net Income CAGR (5Y): 16%
- Revenue CAGR (5Y): 12%
Step 2: Normalize Each Metric (Convert to a 0-100 Score)
Since metrics are measured differently (percentages vs absolute numbers), we need to standardize them. Here’s the institutional approach:
For Growth Metrics (OCF, EPS, Net Income, Revenue):
- Excellent Growth (≥20% CAGR) = 100 points
- Strong Growth (15-20% CAGR) = 80 points
- Good Growth (10-15% CAGR) = 60 points
- Moderate Growth (5-10% CAGR) = 40 points
- Weak Growth (<5% CAGR) = 20 points
- Negative Growth = 0 points
For ROE:
- Exceptional (≥25%) = 100 points
- Excellent (20-25%) = 80 points
- Good (15-20%) = 60 points
- Average (10-15%) = 40 points
- Below Average (<10%) = 20 points
Company XYZ Normalized Scores:
- OCF (15% CAGR) = 80 points
- ROE (22%) = 80 points
- EPS (18% CAGR) = 80 points
- Net Income (16% CAGR) = 80 points
- Revenue (12% CAGR) = 60 points
Step 3: Apply the Weights
Multiply each normalized score by its weight:
| Metric | Score | Weight | Weighted Score |
|---|---|---|---|
| Operating Cash Flow | 80 | 30% | 24.0 |
| ROE | 80 | 25% | 20.0 |
| EPS Growth | 80 | 20% | 16.0 |
| Net Income Growth | 80 | 15% | 12.0 |
| Revenue Growth | 60 | 10% | 6.0 |
| TOTAL SCORE | 78.0/100 |
Step 4: Interpret the Final Score
| Score Range | Investment Grade | Action |
|---|---|---|
| 80-100 | Exceptional Quality | Strong Buy (core holding) |
| 60-79 | High Quality | Buy (suitable for portfolio) |
| 40-59 | Average Quality | Hold/Monitor (requires deeper dive) |
| 20-39 | Below Average | Avoid (unless special situation) |
| 0-19 | Poor Quality | Strong Avoid |
Company XYZ scored 78/100 → High Quality stock suitable for institutional portfolios.
Step 5: Add Qualitative Adjustments
Professional analysts don’t stop at the numbers. Apply these adjustments:
Bonus Points (+5 to +10):
- OCF consistently exceeds Net Income for 5+ years
- ROE achieved with Debt/Equity < 0.5
- Insider buying in the last 12 months
- Widening moat (pricing power evidence)
Penalty Points (-5 to -10):
- OCF volatile or declining despite earnings growth
- High ROE driven primarily by leverage (Debt/Equity > 2)
- Significant stock dilution
- Regulatory/legal headwinds
Real-World Case Study: Pakistan Automobile Sector
Now let’s apply this framework to two actual companies from the Pakistan Stock Exchange automobile sector: Sazgar Engineering Works Limited (SAZEW) and Indus Motor Company Limited (INDU).
Both are assemblers and manufacturers, but their fundamental profiles tell very different stories.
Company Profile: SAZEW
Sazgar Engineering Works (SAZEW) manufactures three-wheelers, four-wheelers (Haval SUVs under Chinese partnership), automotive parts, and household appliances.
Recent Financial Data (FY 2024-2025):
- Net Profit: Rs. 16.3 billion (106% YoY growth) PakWheels
- EPS: Rs. 270.22 (vs Rs. 131.12 previous year) PakWheels
- Revenue: Rs. 108.7 billion (89% YoY growth) PakWheels
- ROE: 122% PakWheels
- Operating Cash Flow (LTM): Rs. 9.20 billion StockAnalysis
5-Year Historical Context: Based on available data:
- 2020: Revenue Rs. 4.03 billion, Net Loss Rs. 27.64 million Business Recorder
- 2021: Revenue Rs. 4.03 billion, Net Profit Rs. 75.799 million Business Recorder
- 2022: Revenue Rs. 10.274 billion, Net Profit Rs. 117.84 million Business Recorder
- 2023: Revenue Rs. 18.174 billion, Net Profit Rs. 995.077 million Business Recorder
- 2024: Revenue Rs. 57.642 billion, Net Profit Rs. 7.94 billion ProPakistani
- 2025: Revenue Rs. 108.69 billion, Net Profit Rs. 16.34 billion ProPakistani
Company Profile: INDU
Indus Motor Company (INDU) is a joint venture with Toyota Motor Corporation, assembling and distributing Toyota and Daihatsu vehicles in Pakistan. It’s a mature, established player.
Recent Financial Data (LTM):
- Net Profit: Rs. 16.95 billion Stock Analysis
- EPS: Rs. 215.62 Stock Analysis
- Revenue: Rs. 161.41 billion Stock Analysis
- ROE: 25.42% Stock Analysis
- Operating Cash Flow: Rs. 39.23 billion Stock Analysis
5-Year Historical Context:
- 2021: Revenue Rs. 179.16 billion, Net Profit Rs. 12.828 billion, EPS Rs. 163.21 Business Recorder
- 2022: Revenue Rs. 275.31 billion, Net Profit Rs. 15.803 billion, EPS Rs. 201.04 Business Recorder
- 2023: Revenue Rs. 177.51 billion (35.5% decline), Net Profit declined Business Recorder
- 2024-2025: Recovery phase with strong profitability
Comparative Analysis Using Our Framework
Let me calculate the institutional scores for both companies:
SAZEW – Detailed Calculation
Step 1: Calculate 5-Year CAGRs
Revenue Growth (2020-2025):
- Starting (2020): Rs. 4.03 billion
- Ending (2025): Rs. 108.69 billion
- CAGR = [(108.69/4.03)^(1/5)] – 1 = 91.7%
Net Income Growth (2020-2025):
- Starting (2020): Rs. -27.64 million (loss)
- Due to loss base, we’ll use 2021-2025
- Starting (2021): Rs. 75.799 million
- Ending (2025): Rs. 16,340 million
- CAGR = 195.7%
EPS Growth (Available data 2021-2025):
- Starting (2021): Rs. 1.25
- Ending (2025): Rs. 270.22
- CAGR = 186.5%
ROE (Current): 122% PakWheels
OCF Growth: Limited historical data, but current LTM: Rs. 9.20 billion StockAnalysis
Step 2: Normalize Scores
| Metric | Value | Score | Reasoning |
|---|---|---|---|
| Operating Cash Flow | Limited data | 60 | Conservative due to data limitations |
| ROE | 122% | 100 | Exceptional (≥25%) |
| EPS Growth | 186.5% CAGR | 100 | Excellent (≥20%) |
| Net Income Growth | 195.7% CAGR | 100 | Excellent (≥20%) |
| Revenue Growth | 91.7% CAGR | 100 | Excellent (≥20%) |
Step 3: Apply Weights
| Metric | Score | Weight | Weighted Score |
|---|---|---|---|
| Operating Cash Flow | 60 | 30% | 18.0 |
| ROE | 100 | 25% | 25.0 |
| EPS Growth | 100 | 20% | 20.0 |
| Net Income Growth | 100 | 15% | 15.0 |
| Revenue Growth | 100 | 10% | 10.0 |
| TOTAL SCORE | 88.0/100 |
Qualitative Adjustments:
- Warning (-5): Extremely high ROE (122%) could be leverage-driven or unsustainable
- Warning (-5): Rapid growth from small base—needs monitoring for sustainability
- Positive (+3): Strong volume growth in Haval segment showing market acceptance
Adjusted SAZEW Score: 81/100 → Exceptional Quality
INDU – Detailed Calculation
Step 1: Calculate 5-Year CAGRs
Using 2021-2025 data (most reliable period):
Revenue Growth (2021-2025):
- Starting (2021): Rs. 179.16 billion
- Ending (2025): Rs. 161.41 billion (LTM)
- CAGR = -2.6% (decline)
Net Income Growth (2021-2025):
- Starting (2021): Rs. 12.828 billion
- Ending (2025): Rs. 16.95 billion
- CAGR = 7.2%
EPS Growth (2021-2025):
- Starting (2021): Rs. 163.21
- Ending (2025): Rs. 215.62
- CAGR = 7.2%
ROE (Current): 25.42% Stock Analysis
OCF (Current): Rs. 39.23 billion Stock Analysis
Step 2: Normalize Scores
| Metric | Value | Score | Reasoning |
|---|---|---|---|
| Operating Cash Flow | Strong, stable | 80 | Excellent conversion and consistency |
| ROE | 25.42% | 100 | Exceptional (≥25%) |
| EPS Growth | 7.2% CAGR | 40 | Moderate (5-10%) |
| Net Income Growth | 7.2% CAGR | 40 | Moderate (5-10%) |
| Revenue Growth | -2.6% CAGR | 0 | Negative growth |
Step 3: Apply Weights
| Metric | Score | Weight | Weighted Score |
|---|---|---|---|
| Operating Cash Flow | 80 | 30% | 24.0 |
| ROE | 100 | 25% | 25.0 |
| EPS Growth | 40 | 20% | 8.0 |
| Net Income Growth | 40 | 15% | 6.0 |
| Revenue Growth | 0 | 10% | 0.0 |
| TOTAL SCORE | 63.0/100 |
Qualitative Adjustments:
- Positive (+5): Net cash position of Rs. 84.01 billion—fortress balance sheet Stock Analysis
- Positive (+5): Established Toyota brand with pricing power
- Positive (+3): Debt-to-equity only 0.003 (essentially debt-free) Stock Analysis
- Warning (-3): Volume volatility due to import restrictions and policy changes
Adjusted INDU Score: 73/100 → High Quality
The Institutional Verdict
SAZEW: Score 81/100 – Exceptional Quality (High Growth)
Investment Profile:
- Type: High-growth, momentum play
- Stage: Rapid expansion phase
- Risk Level: Moderate-High
Key Strengths:
- Earnings growing at 86.4% annually over 5 years Simply Wall St
- Explosive revenue growth driven by Haval success
- Strong ROE of 122% PakWheels showing efficient capital deployment
- Successfully pivoting from three-wheelers to premium SUVs
Key Concerns:
- Operating cash flow data limited—needs monitoring
- Very high growth rates may not be sustainable
- Smaller company, more execution risk
- Extreme ROE could indicate leverage or one-time factors
Institutional View: “This is a transformation story. SAZEW has successfully transitioned from a struggling three-wheeler manufacturer to a player in the four-wheeler segment. The numbers are explosive, but investors should monitor cash flow quality and whether margins can be sustained as competition intensifies.”
INDU: Score 73/100 – High Quality (Mature Cash Cow)
Investment Profile:
- Type: Defensive, dividend-paying blue chip
- Stage: Mature, cyclical recovery
- Risk Level: Low-Moderate
Key Strengths:
- Exceptional cash generation: Rs. 39.23 billion operating cash flow Stock Analysis
- Net cash position of Rs. 84.01 billion Stock Analysis—bullet-proof balance sheet
- Strong brand equity (Toyota)
- High ROE of 25.42% Stock Analysis achieved with minimal leverage
- Dividend yield: 5.51% Stock Analysis
Key Concerns:
- Revenue declined in recent years due to volume pressures Simply Wall St
- Growth limited by market size and regulatory headwinds
- 5-year earnings growth only 9.3% per year Simply Wall St
- Cyclical exposure to auto sector policies
Institutional View: “INDU is a quality cash-generating machine with fortress-like financials. The Toyota partnership provides stability, and the massive cash position offers downside protection. However, growth is constrained. This is a ‘sleep well at night’ holding for conservative institutional portfolios seeking dividends and capital preservation.”
Head-to-Head Comparison
| Metric | SAZEW | INDU | Winner |
|---|---|---|---|
| Composite Score | 81/100 | 73/100 | SAZEW |
| Growth Profile | Explosive | Moderate | SAZEW |
| Cash Flow Quality | Good (needs data) | Exceptional | INDU |
| Balance Sheet Strength | Growing | Fortress | INDU |
| ROE | 122% | 25.42% | SAZEW |
| Risk Level | Moderate-High | Low-Moderate | INDU |
| Dividend Yield | Low | 5.51% | INDU |
| 5Y Revenue CAGR | 91.7% | -2.6% | SAZEW |
| 5Y EPS CAGR | 186.5% | 7.2% | SAZEW |
Investment Recommendations
For Aggressive Growth Portfolios:
Buy SAZEW – The transformation story is compelling, and momentum is strong. However, limit position size to 3-5% due to execution risk.
For Conservative Income Portfolios:
Buy INDU – Defensive characteristics, strong cash generation, and attractive dividend make it ideal for risk-averse investors.
For Balanced Institutional Portfolios:
Hold both at different weights:
- SAZEW: 3-4% allocation (tactical growth position)
- INDU: 5-7% allocation (core defensive holding)
The Golden Rule of Stock Selection
Cash flow validates earnings. ROE measures quality. EPS drives price. Revenue supports the story.
When all metrics align—strong cash generation, high sustainable ROE, steady EPS growth, and profitable revenue expansion—you’ve found a compounding machine. These are the stocks that institutional portfolios are built around.
SAZEW shows explosive growth metrics but needs cash flow monitoring. INDU shows exceptional cash flow and balance sheet strength but limited growth.
Neither is “perfect”—and that’s the point. Real-world investing requires trade-offs.
Practical Application Checklist
Before committing capital, ask yourself:
- Is this company generating real cash, or just accounting profits?
- SAZEW: Needs more data; INDU: ✓ Exceptional
- Is ROE sustainable, or driven by leverage and financial tricks?
- SAZEW: Monitor closely; INDU: ✓ Sustainable
- Is EPS growth genuine, or manufactured through buybacks?
- SAZEW: ✓ Organic; INDU: ✓ Organic
- Does net income support the cash flow story?
- SAZEW: Appears aligned; INDU: ✓ Fully aligned
- Is revenue growth translating into margin expansion?
- SAZEW: ✓ Yes, dramatically; INDU: Stable margins
Master this calculation framework, and you’ll start evaluating stocks exactly like the professionals managing billions.
Remember: The best stock depends on your portfolio objectives, risk tolerance, and investment time horizon. Use this framework as a starting point, not a definitive answer.