The 8 Pillars, explained one test at a time
Eight pass-or-fail tests covering price, quality, growth, and the balance sheet. Here is what each one is actually asking.
A screen is only useful if you can explain every line of it. The 8 Pillars are eight independent pass-or-fail tests, each with a published threshold and each answering a different question about a business. Nothing is weighted, and no pillar is allowed to compensate for another.
Price: what you are paying
1. Five-year average P/E below 22.5
Caps what you pay per dollar of profit. The five-year average matters: a single exceptional or terrible year can make an expensive business look cheap, or the reverse.
2. Five-year average price to free cash flow below 22.5
The same discipline against cash rather than reported earnings. Cash is considerably harder to manage into the shape a management team would prefer.
Quality: whether the business deserves the money
3. Five-year average ROIC above 9%
The clearest single read on business quality. A company earning well above its cost of capital compounds shareholder money as it grows; one earning below it does the opposite.
Growth: whether it is getting better
4, 5, and 6. Revenue, net income, and free cash flow growing over ten years
Three separate tests, because they can disagree in informative ways. Revenue growing while profit stalls points to competition or cost inflation. Profit growing while cash flow does not is worth investigating carefully.
Safety: whether it survives a bad decade
7. Share count flat or falling
Buybacks hand you a growing share of the same business. A rising count dilutes you, which is why headline profit growth and profit growth per share can tell different stories.
8. Long-term debt payable from under five years of free cash flow
A survivability test. A business that could clear its long-term debt with a few years of cash flow can absorb a downturn without diluting shareholders or refinancing at the worst possible moment.
When a failed pillar is acceptable
Scoring eight out of eight is rare, and demanding it leaves you with a very short list of mostly slow-growing businesses. The useful question is not how many pillars passed but whether you can explain each failure.
- A high-quality business failing only the P/E pillar is expensive, not bad. That is a question about entry price, and a watchlist entry rather than a rejection.
- A company failing the debt pillar during a deliberate, disclosed expansion may be defensible — if you can see what the borrowing bought.
- A rising share count at a company issuing equity to fund genuinely high-return investment is different from one diluting to pay staff.
- Failing growth pillars because of one collapsed year in a ten-year window deserves a look at the year, not an automatic no.
Common questions
Do all 8 pillars need to pass?
No. Very few companies pass all eight at an attractive price. What matters is understanding why each pillar failed and whether that reason is acceptable to you.
Why 22.5 as the P/E threshold?
It comes from the classic rule of thumb that a reasonable price sits where the P/E multiplied by the price-to-book ratio stays modest. Treat it as a disciplined ceiling rather than a precise scientific boundary.
Can the 8 Pillars be used for banks or insurers?
Only with care. Financial companies carry debt as raw material rather than as leverage, so the debt-to-free-cash-flow pillar does not read the same way. The quality and growth pillars still apply.
Paul Gabrail
Founder
Founder of Everything Money. Former commercial real estate investor who has spent two decades analysing businesses for his own account.