The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

reasonable to say that any firm that’s able to convert more than 5 percent of sales to free cash flow—just divide free cash flow by sales to get this percentage—is doing a solid job at generating excess cash.

If a Founder or Large Owner Is Still Involved in the Company, Does He or She Also Get a Big Stock Option Grant Each Year? This makes me queasy.

better—financial leverage is something you need to watch carefully. As with any kind of debt, a judicious amount can boost returns, but too much can lead to disaster.

Think of ROA as a measure of efficiency.

(Note: Low-quality growth doesn’t imply that a company is cooking the books, merely that the growth rate isn’t likely to be sustained over the long haul.)

to really understand a firm, you’ll need to look up 10-Ks and 10-Qs. These are dense, detailed sets of financial information that companies file with the Securities and Exchange Commission (SEC) every year

Here’s what you need to know for practical purposes: As interest rates increase, so will discount rates. As a firm’s risk level increases, so will its discount rate.

look at the situation from the customer’s perspective.

Comparing cash flow from operations to reported earnings per share is another good way to get a rough idea of a firm’s profitability because cash flow from operations represents real profits.