5 Things to Check Before Buying a Stock (That Aren't the Price)

"Is €180 expensive for this stock?" is not a question that has an answer on its own. A €180 stock can be wildly overpriced or a bargain. It depends entirely on what's happening inside the business. Two companies can trade at similar prices and similar P/E ratios and be completely different investments.

The checks below don't require a finance degree or a spreadsheet. Each one takes a couple of minutes on a company's fundamentals page, and together they tell you far more about whether a business is actually getting stronger or quietly getting worse than the price ever will.

One caveat: this checklist is built for growth and quality businesses, companies expected to keep growing revenue and earnings over time. It's a poor fit for turnarounds (where the whole thesis is that a broken business is about to get better, not that current trends will continue), asset plays (where the value is in what the company owns, not in its income statement), or deep cyclicals (where revenue and margins swing with the commodity or industry cycle by design, and a 'deteriorating' trend can just mean the cycle is turning). Know which kind of stock you're looking at before applying these checks.

A single quarter of revenue growth tells you almost nothing. You need the trend. Look at year-over-year revenue growth over the last 6-8 quarters. Is the growth rate holding steady, speeding up, or slowing down each quarter?

A company growing revenue 15% this quarter sounds healthy until you notice it grew 25% four quarters ago. That's deceleration, and the market usually punishes it long before the growth rate actually turns negative, because the market is pricing in where the trend is heading, not where it's been.

Carvana's 2022 quarters are a textbook real example. Revenue growth (year-over-year) went from +55.8% in Q1 to +16.4% by Q2, then flipped negative by Q3 and kept falling. Anyone tracking the trend quarter by quarter had a clear warning sign well before the headline numbers turned ugly: the deceleration was visible two full quarters before growth actually went negative.

This is the same company we'll use throughout this piece: later checks show why the deceleration wasn't a one-off, but the leading edge of several problems compounding at once.

It's also worth running the same trend check on earnings, not just revenue, and watching how the two move relative to each other. Accelerating revenue with flat or accelerating earnings is the healthiest combination. Accelerating revenue with flat or declining earnings needs a closer look: it can mean the business model is broken, or it can mean management is deliberately reinvesting every dollar of gross profit into growth, betting scale will bring the earnings later. MercadoLibre is a good example of the second, less alarming case: it posted strong revenue growth for years while margins stayed thin, because profit was being plowed back into logistics and fintech infrastructure across Latin America rather than lost to a broken model.

Revenue growth means nothing if the company is spending more and more to get it. Check gross margin and operating margin over the same 6-8 quarter window as the revenue check above.

Expanding margins alongside revenue growth is the combination that compounds: the business is getting both bigger and more efficient at the same time. Compressing margins during a period of slowing growth is often confirmation that a deceleration isn't a fluke: rising costs, discounting to keep growth alive, or eroding pricing power tend to show up in both metrics at once.

Carvana's gross margin shows exactly that, and it started cracking even earlier than the revenue deceleration did. Margin fell from 16.5% in Q2 2021 to just 6.8% by Q4 2022, falling by nearly 60% over seven quarters, a full three quarters before revenue growth itself turned negative in the table above. It wasn't a straight line down: margin ticked up slightly in Q2-Q3 2022 before the bottom fell out in Q4. That's the value of checking both: margin compression was an early warning sign, visible well before the growth numbers confirmed anything was wrong, even with a brief wobble along the way.

Debt itself isn't a problem. Plenty of great businesses use it well. What matters is whether the company can comfortably service it, and whether the debt is growing in line with the business or outrunning it. A useful check: net debt (total debt minus cash on hand) relative to operating income, roughly, how many years of current operating earnings it would take to pay off everything the company owes, net of its cash cushion.

There is no single threshold that works across industries, and this is where a lot of checklists mislead people. A payments network like Visa doesn't need debt to fund its day-to-day operations, but that doesn't mean its balance sheet stays debt-free. It still carries tens of billions in bonds, mostly issued to fund buybacks and other capital returns rather than the core business. A used-car retailer like Carvana, by contrast, carries debt tied directly to the business itself: floorplan financing for inventory and auto loans are a normal part of that model, not a warning sign by themselves. Compared on absolute debt alone, as the table below does at first glance, Visa looks like the more indebted company. It isn't, which is exactly why the ratio matters more than the dollar figure.

What made Carvana's debt a real problem wasn't that it had debt: it's the trajectory. Total debt went from $932M in 2019 to $6.8B in 2022, more than 7x in three years, growing far faster than revenue and while losses were widening every year, not shrinking. Visa's debt, by comparison, grew roughly in line with its net income over the same stretch (both up about 23%): a company simply scaling its balance sheet alongside its earnings, not taking on risk ahead of them. Same direction of check, completely different verdict, because the trajectory relative to earnings is what matters, not the industry-adjusted absolute level alone.

Run the actual ratio and the picture sharpens further. Visa's net debt sat between roughly 0.8x and 1.3x a single year of operating income throughout 2019-2022, well under two years of operating earnings would clear the entire balance. Carvana's version of that ratio doesn't compute at all for the same stretch: operating income was negative in every one of those four years, so there was no operating earnings to measure the debt against in the first place. That's a more serious flag than any specific multiple: a company can survive a high debt-to-earnings ratio, but one with debt and no earnings to service it is entirely dependent on continuing to raise fresh cash, which is exactly what pushed Carvana into the share dilution covered in check #5.

Debt load matters most in a downturn: it's the companies with stretched, fast-growing balance sheets that get forced into dilutive raises or asset sales when conditions turn, while well-capitalized competitors use the same downturn to gain share.

Net income is an accounting figure: it includes non-cash items and is shaped by choices around depreciation, stock-based compensation, and working capital timing. Free cash flow (operating cash flow minus capital expenditures) is closer to the actual cash landing in the company's bank account.

Compare the two over the last few years. If free cash flow is consistently tracking below net income, or the gap is widening, dig into why: heavy stock-based compensation, rising capex, or deteriorating working capital are common culprits, and each tells a different story about the quality of the reported earnings.

This is also where GAAP and Non-GAAP (or "adjusted") earnings matter. GAAP earnings follow standardized accounting rules and are the figure filed with regulators, it's the closest thing to an apples-to-apples number across companies. Non-GAAP earnings are a company's own adjusted version, typically stripping out items like stock-based compensation, restructuring costs, or amortization of acquired intangibles, on the argument that these don't reflect the 'core' business.

Sometimes that argument is reasonable, a one-off restructuring charge really is one-off. But stock-based compensation is a recurring, real cost of running the business (it dilutes existing shareholders even though no cash changes hands), and companies that lean heavily on Non-GAAP figures are often using them to present a much rosier picture than GAAP would show. The gap between a company's GAAP and Non-GAAP earnings, tracked over several years, is itself a useful signal: a small, stable gap is normal; a large and widening one is worth understanding before trusting the headline 'adjusted EPS' number the market reacts to.

Carvana's free cash flow makes the point plainly: it was negative every year from 2019 through 2022, and getting worse, not better, as revenue grew, hitting -$3.15B in 2021 alone, the same year revenue growth looked most impressive. Visa's free cash flow, by contrast, tracked closely with net income throughout, which is what you'd expect from a business converting its reported profit into real cash rather than reinvesting it into working capital or debt-funded growth just to keep the top line moving.

Your ownership stake in a company isn't just about the business doing well: it's about what fraction of that business your shares represent. Check the share count trend over the last 3-5 years.

A shrinking share count (buybacks outpacing new issuance) means your slice of the pie is growing even if you never buy another share. A steadily rising share count, common at companies that lean heavily on stock-based compensation to pay employees, or that fund growth by issuing new equity, means the business has to grow faster than the dilution just for your per-share ownership to stand still. It's easy to miss because it never shows up as a single dramatic event, just a slow leak.

Visa and Carvana over the same stretch of years show both directions side by side. Visa's share count actually fell slightly even while the business grew, because buybacks outpaced the new shares issued for compensation. Carvana's share count more than doubled over four years, as the company kept raising equity to fund its growth and cover its losses, meaning even investors who held on through the revenue growth saw their ownership stake shrink the whole time.

Line up all five checks side by side and the pattern from the sections above becomes obvious: Visa's checks all point the same direction, and so do Carvana's, just opposite directions. That's the entire point of running all five instead of relying on any single number.

Carvana's stock lost the large majority of its value by the end of 2022, roughly in line with what all five deteriorating checks above would suggest. But the story didn't end there, and it's worth being honest about that rather than cherry-picking the ending that fits the lesson.

By 2023-2025, revenue growth resumed (reaching $20.3B in 2025), gross margin recovered to around 20% (well above even its pre-crisis levels), net income and free cash flow both turned positive, and total debt was paid down from $6.8B to about $5.1B. Four of the five checks genuinely reversed. But shares outstanding kept climbing through the entire recovery too, from 106M in 2022 to 143M in 2025, meaning even investors who held on through the turnaround saw their ownership stake keep shrinking the whole time. A business can fix most of its red flags without fixing all of them, and the checklist's job is to tell you which ones remain, not to predict the stock price.

Run these five checks together, not in isolation, and revisit them: a business's checklist result isn't fixed forever, as Carvana's own recovery shows.