VMCI Scoring Methodology
Complete technical reference for the ValueMarkers Composite Index. How 120 fundamental indicators feed into 5 pillars to rank stocks on value, quality, integrity, growth, and risk. Transparent, reproducible, peer-reviewed.
The VMCI Formula (TL;DR)
VMCI = 0.35*VALUE + 0.30*QUALITY + 0.15*INTEGRITY + 0.12*GROWTH + 0.08*RISKEach pillar is the average percentile rank of its indicators (0-100). Percentile means: if P/E is in the 85th percentile, the stock is cheaper than 85% of all stocks. VMCI = 0-100 scale. Scores 70+ = excellent; 50-70 = good; 25-50 = fair; <25 = poor.
The 5 VMCI Pillars
Value Pillar
35% of overall VMCI
Measures how cheap a stock is relative to its earnings, cash flow, book value, and other measures of underlying worth. Low multiple + high margin of safety = high value score.
Price-to-Earnings Ratios
Compares stock price to net earnings. Lower = potentially cheaper. Forward P/E uses analyst estimates for the next 12 months. PEG adjusts P/E for expected growth.
Price-to-Book & Price-to-Sales
P/B compares price to book (assets minus liabilities). Works best for asset-heavy companies. P/S avoids earnings manipulation since sales are harder to fake.
Enterprise Value Metrics
Enterprise Value (market cap + net debt) shows total enterprise worth. EV/EBITDA is the gold standard for comparing companies with different capital structures.
Cash Flow Yields
Dividend yield analogs using free cash flow instead of earnings. More conservative than earnings-based measures because cash doesn't lie.
Special Value Screens
Graham Number combines P/E and P/B to find "reasonably priced" stocks. Net-Net is Ben Graham's deep value metric. Intrinsic value comes from transparent DCF models.
Quality Pillar
30% of overall VMCI
Measures the operational excellence, profitability, and consistency of a business. High-quality businesses earn strong returns on capital, have sticky customer relationships, and generate real cash.
Return on Capital
ROE shows how much profit the company generates per dollar of shareholder equity. ROIC shows profit per dollar of total capital (equity + debt). ROIC > WACC signals value-additive growth.
Profitability Margins
Margins show what % of revenue becomes profit at each level. Wide margins = pricing power. Margins are the DNA of quality: compare Apple (22% net margin) vs commodity retailers (2-3%).
Cash Flow Quality
Shows what % of reported earnings actually comes in as cash. High-quality earnings convert to cash. If FCF/earnings < 0.5, the company is manipulating accounting.
Growth Consistency
Measures how consistently the company grows. A company growing 20% predictably beats one growing 40% erratically. Stability = less risk.
ROIC vs WACC Spread
The spread between ROIC and WACC (weighted average cost of capital) shows value creation. ROIC > WACC = the company creates value. Negative spread = value destruction.
Integrity Pillar
15% of overall VMCI
Measures financial health, balance sheet strength, and the absence of red flags (fraud risk, insolvency risk, hidden liabilities).
Leverage & Solvency
D/E shows how much debt per dollar of equity. Net Debt/EBITDA shows how many years to pay off debt from cash flow. Interest Coverage shows ability to service debt. Current Ratio (liquidity) should be > 1.
Piotroski F-Score
Binary signals of financial strength: positive net income, positive operating cash flow, increasing ROA, high quality earnings, low leverage, high liquidity, no new shares issued, low COGS as % of sales, high asset turnover. Score 8-9 = highest confidence.
Altman Z-Score
Combines 5 metrics (working capital/assets, retained earnings/assets, EBIT/assets, market value/liabilities, sales/assets) into bankruptcy probability. Z > 2.99 = safe zone. Z < 1.81 = high bankruptcy risk.
Beneish M-Score
Flags accounting manipulation through 8 signals: DSRI (receivables quality), GMI (gross margin), AQI (asset quality), SGI (sales growth), DEPI (depreciation), SGAI (opex), LVGI (leverage growth), TATA (total accruals vs operating cash flow). Score > -1.78 = likely manipulator.
Other Red Flags
Quick ratio (current assets minus inventory / current liabilities) is more conservative. Negative working capital trends suggest liquidity stress. Warranty reserves signal potential hidden liabilities.
Growth Pillar
12% of overall VMCI
Measures the rate at which revenue and earnings are expanding. Growth above inflation signals market share gains or pricing power. But growth without profitability is not quality.
Revenue Growth
Top-line growth is the most reliable growth metric. Earnings can be manipulated, but revenue growth usually indicates real business expansion. Target: > inflation rate (2-3%).
Earnings Growth
Bottom-line growth. Should exceed revenue growth if margins are expanding. If earnings grow but revenue stalls, margins must be improving or share count shrinking.
Free Cash Flow Growth
The most conservative growth metric. FCF is what's available for dividends or debt paydown. If FCF growth < earnings growth, capital intensity is increasing.
Dividend & Payout Growth
Dividends are a credible signal of confidence in future cash flows. If management cuts dividends, growth expectations have fallen. Growing dividends on growing earnings = virtuous cycle.
Risk Pillar
8% of overall VMCI
Measures the volatility, cyclicality, and downside vulnerability of the stock. High risk = high beta, high debt, cyclical industry.
Volatility & Beta
Beta > 1 = more volatile than the market. A stock with beta 1.5 swings 50% more than the S&P 500. Value investors prefer lower beta (0.8-1.2) for predictability.
Debt Service Capacity
Can the company pay interest out of operating cash flow? Coverage ratio > 3 is comfortable. Coverage < 1.5 is risky. Negative FCF means debt can't be serviced long-term.
Capital Intensity & Capex Burden
High-capex businesses (manufacturing, utilities) are capital traps. Low-capex (software, consulting) have higher FCF conversion. Capex > depreciation signals growth capex; capex = depreciation signals maintenance.
Business Cycle Sensitivity
Cyclical industries (autos, chemicals, construction) see earnings swings with GDP. Defensive industries (utilities, staples) have stable earnings. Value investors avoid cyclicals at the peak of the cycle.
Concentration & Dependence Risk
If 50% of revenue comes from 1-2 customers, that's single-customer risk. If all revenue is domestic, geopolitical risk matters. Diversified is lower risk.
The Quality Triple Check
The highest confidence investment signal is a stock that passes all three quality gates. These are the three most respected financial health frameworks in academic value investing research.
Piotroski F-Score
Scale: 0-9
Safe: 8-9
Risky: 0-4
Binary signals: positive net income, positive OCF, increasing ROA, high earnings quality, low leverage, high liquidity, no share dilution, high sales efficiency, high asset turnover.
A company scoring 8-9 is financially healthy. Score 0-4 suggests balance sheet stress. This test catches distressed companies before they collapse.
Altman Z-Score
Scale: 0-10+
Safe: > 2.99
Risky: < 1.81
Combines working capital/assets, retained earnings/assets, EBIT/assets, market value equity/liabilities, and sales/assets. Originally developed to predict bankruptcy.
Z > 2.99 = safe zone (low bankruptcy risk). Z 1.81-2.99 = gray zone (monitor). Z < 1.81 = distress zone (high bankruptcy risk within 2 years).
Beneish M-Score
Scale: -2 to +2
Safe: < -1.78
Risky: > -1.78
Detects earnings manipulation through: receivables quality, gross margin trends, asset quality, sales growth, depreciation rates, SGI ratios, leverage growth, and total accruals.
Score < -1.78 = likely manipulator (88% accuracy). Score -1.78 to 0 = maybe okay. Score > 0 = definitely suspicious. Companies like Enron scored +7.
Gamification Value Score (Beginner-Friendly)
For users new to investing, we simplify VMCI into three intuitive tests. This matches the "Three Questions of Value Investing": Is it cheap? Is it good? Is it safe?
Price Test
40% of score
"Is it cheap?"
Compares the stock price to underlying earnings, book value, and cash flow. Low multiples = cheap. All four metrics must agree.
Key indicators:
- P/E TTM
- P/B Ratio
- EV/EBITDA
- FCF Yield
- Earnings Yield
Quality Test
40% of score
"Is the business good?"
Is this a strong business with good returns on capital, consistent earnings, and growing revenue? Quality companies compound wealth over time.
Key indicators:
- ROE
- Net Margin
- FCF/Earnings
- Revenue Growth
- Earnings Stability
Safety Test
20% of score
"Is it safe?"
Does the balance sheet have room for error? Low debt, high liquidity, and passing Piotroski/Altman tests. Cap at 30 if Beneish M > -1.78.
Key indicators:
- D/E Ratio
- Current Ratio
- Piotroski F-Score
- Altman Z-Score
Safety Hard Floor: If Beneish M-Score > -1.78 (likely earnings manipulator), the Safety Test score is capped at 30, regardless of balance sheet metrics. This prevents investing in accounting frauds, even if they look cheap and safe on paper.
Why Percentile Ranking?
VMCI uses percentile ranks, not raw values, for a critical reason: a P/E of 10 means something different for a tech company vs. a utility. Percentiles solve this by comparing each stock to its peers.
Example: Comparing Apple and Dominion Energy
Raw P/E: Apple P/E = 28, Dominion Energy P/E = 18. Looks like Dominion is cheaper.
Market context: Tech stocks trade at 25-35 P/E (Apple's 28 is 50th percentile = average for tech). Utility stocks trade at 15-20 P/E (Dominion's 18 is 75th percentile = expensive for utilities).
Percentile verdict: Despite a higher P/E, Dominion is actually more expensive relative to its peers. Apple gets 50/100 on P/E. Dominion gets 25/100 on P/E.
Percentile ranking normalizes cross-industry comparisons. A fintech with high growth might get a high P/E percentile (40th = pricey for its growth) while a mature pharmaceutical with low growth gets a low P/E percentile (80th = cheap for its industry). Both are comparable on the same 0-100 scale.
Why These Weights?
The 35%-30%-15%-12%-8% weighting reflects the investing philosophy of Benjamin Graham + Warren Buffett combined.
35% VALUE
"Benjamin Graham: "The essence of value investing is to buy a stock for less than what it's worth." You must get the price right. Too cheap = margin of safety. Too expensive = no margin of safety."
30% QUALITY
"Warren Buffett: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Quality trumps price if price is reasonable. Growth + high returns on capital = compounding."
15% INTEGRITY
"Charlie Munger: "I want to be able to explain why I'm buying a stock. If I can't understand the balance sheet, I don't buy it." Frauds and balance sheet disasters destroy wealth. Safety first."
12% GROWTH
"Peter Lynch: "Growth is good, but not at any price." Growth at reasonable multiples is better than no growth. Growth without profitability is a trap. We want profitable growth."
8% RISK
"Nassim Taleb: "The key principle is to manage risk, not maximize returns." Avoid tail risks: high beta, high debt, cyclical industries at peaks. Risk is a tiebreaker."
Transparency & Reproducibility
VMCI is published in full. Every formula, every weight, every indicator is open-source documentation. You can replicate VMCI outside of ValueMarkers if you have the same financial data (we use FMP API and SEC filings). This is glass-box scoring, the opposite of black-box AI systems that can't be audited.
What You Can See
- Complete list of 120 indicators with formulas
- Pillar weights (35%, 30%, 15%, 12%, 8%)
- Percentile ranking methodology
- Quality Triple Check (F-Score, Z-Score, M-Score)
- Each stock's score breakdown by pillar
- Historical score changes over time
Why This Matters
- You understand why a stock scored 72, not 68
- You can adjust weights for your own strategy
- You can see which indicators matter most
- You can challenge our methodology with data
- You can build your own screener if you want
- Regulators can audit the methodology for bias
Frequently Asked Questions
How is the overall VMCI score calculated?+
VMCI is a weighted sum of 5 pillar scores: VALUE (35%) + QUALITY (30%) + INTEGRITY (15%) + GROWTH (12%) + RISK (8%) = 100%. Each pillar is itself an average of all its indicators (percentile-ranked 0-100). So VMCI = 0.35*VALUE + 0.30*QUALITY + 0.15*INTEGRITY + 0.12*GROWTH + 0.08*RISK. Final score is 0-100. Scores 70+ are excellent; 50-70 are good; 25-50 are fair; <25 are poor.
What does "percentile ranking" mean?+
Each indicator is ranked against all stocks in the universe. If a stock's P/E is lower than 85% of other stocks, it gets a P/E percentile score of 85. This is more robust than absolute values because P/E of 10 is cheap for a tech stock but expensive for a utility. Percentile ranking normalizes comparisons across industries and geographies.
Why are some indicators weighted more than others?+
VALUE gets 35% because valuation is the foundation of value investing-buying low is the entry point. QUALITY gets 30% because only quality companies at low valuations compound wealth; cheap junk stays cheap. INTEGRITY gets 15% to filter out balance sheet disasters. GROWTH gets 12% because we want stocks that compound. RISK gets 8% as a tiebreaker. These weights reflect the philosophy of Ben Graham + Warren Buffett: price (35%) + quality (30%) + safety (15%) + growth (12%) + risk (8%).
What is the Quality Triple Check?+
Three complementary integrity tests: (1) Piotroski F-Score (9-point, checks 9 financial health signals), (2) Altman Z-Score (bankruptcy risk, 0-10 scale), (3) Beneish M-Score (earnings manipulation risk, -2 to +2). A stock passing all three (F-Score 8-9, Z-Score > 2.99, M-Score < -1.78) has passed "the greatest financial quality screen in value investing." Failing any one is a red flag.
What is the Gamification Value Score?+
A simpler, game-like scoring for beginners: Price Test (40%) asks "Is it cheap?" using P/E, P/B, and valuations. Quality Test (40%) asks "Is the business good?" using ROE, margins, and cash flow. Safety Test (20%) asks "Is it safe?" using debt ratios and balance sheet strength. Score 0-100. But if Beneish M-Score > -1.78 (likely manipulator), Safety is capped at 30 regardless. The gamification version helps beginners intuitively understand value, quality, and safety.
How do you handle negative earnings or missing data?+
If a company has negative earnings, P/E is not meaningful and gets no score for that indicator (the company is scored on other indicators in the Value pillar). If a metric is unavailable (e.g., FCF for early-stage companies), we skip it and score on available data. Free tier gets 30 core indicators (always available); paid tiers unlock more specialized indicators (some may be sparse in emerging markets).
Can I see the exact VMCI formula for every stock?+
Yes. VMCI is 100% transparent. Every stock page shows: the individual score for each of the 120 indicators, the percentile for each indicator, the category average (Value, Quality, etc.), and the final weighted score. You can see exactly how a stock scored on P/E (41st percentile), ROE (78th percentile), D/E (52nd percentile), etc. Most competitors hide their formulas. We publish ours because glass-box > black-box.
How often is VMCI updated?+
VMCI recalculates daily when new market prices are published and quarterly when companies report earnings/financials. Indicator scores are continuously updated so comparisons always reflect the latest fundamental data. Annual reports (10-K) are incorporated as soon as they're filed. The leaderboard snapshots the top/bottom 10 stocks daily.
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