We can't just look at a series of past growth rates and assume that they will predict the future - if investing were that easy, money managers would be paid much less, and this stock analysis would be much shorter. It’s critical to investigate the Sources of a company's growth.

Profitability is the second, and in many ways, the most crucial, part of our Analysis framework. How much profit is the company generating relative to the amount of money invested in the business - the returns? This is the real key to separating a great company from average ones -the higher that return, the more attractive that business. Net profit Margins and comparing cash flow from operations to reported earnings per share are good ways to get a rough idea of the company's profitability (because cash flow from Operations represents real profits!). But neither account for the amount of capital that's tied up in the business, and that's something we cant ignore. We need to know how much economic profit the company is able to generate per dollar/rupee of capital employed because it will have more excess profits to re-invest which will give it an advantage over less-efficient competitors.

Can we dig deeper to see what else we can understand about how this company makes money? A good way is to look at the common size profit and loss statement. Common size statements are great tools for evaluating companies because they put every line item in context by looking at each of them as a percentage of Sales.

Once we have figured out how fast (and why) a company has grown and how profitable it is, we need to look at its financial health. Even the most beautiful home needs a solid foundation, after all.