Fundamental investing playbook

Welcome to the learning hub for Icarus Metrics. This guide explains how the Graham, Buffett, and Lynch scores are built, with quick definitions, formulas, and case-style examples you can revisit whenever you research a ticker.

Pick a tab below to focus on value investing (Graham), quality compounding (Buffett), or growth at a reasonable price (Lynch).

Choose your framework

Benjamin Graham: build a defensive moat with price discipline

Graham’s playbook lowers risk first and seeks upside second. The aim is to buy when there is a clear margin of safety between intrinsic value and market price.

Core formulas

Current Ratio = Current Assets / Current Liabilities

D/E = Total Debt / Shareholders' Equity

P/E × P/B ≤ 22.5 — the Graham valuation sanity check

Defensive checklist

Size: Market cap ≥ $2 billion to avoid fragile microcaps.
Liquidity: Current ratio ≥ 2, proving near-term obligations are covered twice over.
Leverage: D/E ≤ 1 with interest coverage > 5×.
Track record: Positive earnings and (ideally) dividends for 10+ years running.
EPS growth: At least +33 % over the past decade.
Valuation guardrails: P/E ≤ 15, P/B ≤ 1.5, and the 22.5 multiplication rule.

Worked example

Metric	Inputs	Outcome
Current ratio	$420M / $180M	2.33 → passes liquidity test
Valuation combo	P/E = 13.8, P/B = 1.4	13.8 × 1.4 = 19.3 < 22.5 (passes)
EPS growth	$1.10 → $1.70	+54 % → exceeds +33 % threshold

Tickers that clear most of these hurdles trend toward a Graham score near 100 inside Icarus Metrics, flagging candidates with a wide margin of safety.

Read next: The Intelligent Investor, Security Analysis, and archived Graham-Newman Partnership letters.

Warren Buffett: quality compounding and capital stewardship

Buffett homes in on companies that treat shareholder capital like their own, reinvesting only when returns justify it and returning excess cash when they cannot.

Key formulas

ROE = Net Income / Average Shareholders' Equity

ROIC = NOPAT / (Equity + Net Debt)

Free Cash Flow = Operating Cash Flow - Capital Expenditures

Quality signals to monitor

ROE ≥ 15 % for at least five consecutive years.
Expanding margins versus industry averages.
Prudent leverage: D/E < 0.8 with interest coverage > 6×.
ROIC ≥ 12 % even after adjusting for stock-based compensation.
Free cash flow growth that comfortably funds dividends and measured buybacks.
Owner-like incentives: Insider ownership, transparent capital allocation commentary, and conservative GAAP reporting.

Mini case study

Hypothetical example: a niche enterprise software provider.

5-year ROE range: 18 % → 24 %, average 21 %.
D/E: 0.35 with net cash position and coverage ratio above 5×.
ROIC: 17 % thanks to subscription renewals and modest capital needs.
Free cash flow: $480M after capex, with 60 % ploughed into R&D and selective M&A.

These traits push the Buffett score toward the upper quartile, highlighting a business capable of compounding intrinsic value year after year.

Read next: The Warren Buffett Way, Berkshire Hathaway shareholder letters, and Quality Investing.

Peter Lynch: growth at a reasonable price (GARP)

Lynch blended growth metrics with valuation sanity checks. The goal is to pay a fair price for companies that can keep compounding earnings without outsized leverage.

Essential formulas

PEG = (Price / EPS) / EPS Growth

EPS CAGR = [(EPS_n / EPS₀)^{1/n}] - 1

Interest Coverage = EBIT / Interest Expense

GARP checklist

PEG ≤ 1.5 (ideally < 1).
EPS CAGR > 12 % across 3- to 5-year windows.
Debt discipline: D/E < 1 with interest coverage > 4×.
Operating margin holding above 12 % as revenue scales.
Resilient profits: minimal down years during recessions.

Example walkthrough

P/E = 22, EPS CAGR (5y) = 24 % → PEG = 0.92 (attractive).
Operating margin: 18 % with 150 bps yearly expansion.
D/E: 0.55 and interest coverage = 8×.
Revenue growth: 15 % supported by product cross-sell, not just price hikes.

Numbers like these drive a high Lynch score in Icarus Metrics, signaling a business that balances growth and valuation responsibly.

Read next: One Up On Wall Street, Beating the Street, and Lynch’s Fidelity Magellan case studies.

Frequently asked questions

Do the style scores combine into one rating?: No. Each style is presented separately so you can decide which philosophy suits the company (or your strategy) best.
Are the thresholds fixed?: We adjust the filters slightly by sector to avoid penalising capital-intensive industries or emerging tech that reinvests heavily.
Can I export this guide?: Print or save the page from your browser. The layout is optimised for both desktop and mobile reading.