Quality Score Framework
The Quality Score Engine evaluates public equities across twelve fundamental and market structure dimensions. Each company receives a composite score out of 100 that is mapped to a letter grade (A+ through D) and paired with risk and confidence signals.
Core Purpose
- Create a repeatable, explainable view of business quality rooted in Benjamin Graham-style defensive investing principles.
- Blend fundamental health, capital efficiency, and market sentiment into a single benchmark.
- Highlight predictive risk factors so analysts can gauge upside resilience and downside exposure.
The 12 Dimensions
- Earnings Quality — Stability of operating income, revenue quality, and accruals ratio.
- Balance Sheet Strength — Debt-to-equity trend, interest coverage, and liquidity runway.
- Capital Efficiency — Return on invested capital (ROIC), asset turnover, and reinvestment discipline.
- Cash Flow Reliability — Free cash flow margin, conversion of earnings to cash, and payout sustainability.
- Margin Durability — Gross/operating margin trend, variance, and industry-relative positioning.
- Growth Trajectory — Revenue and EPS CAGR normalized against sector baselines.
- Valuation Fairness — Forward EV/EBITDA, price-to-free-cash-flow, and earnings yield reasonability.
- Market Position — Competitive moat strength, customer retention, and pricing power indicators.
- Innovation Velocity — R&D intensity, patent issuance, and product launch cadence.
- Governance & Stewardship — Insider alignment, capital allocation track record, and board independence.
- Risk Controls — Volatility regime, downside deviation, and drawdown recovery speed.
- ESG Resilience — Carbon intensity, social impact scoring, and governance controversies monitor.
Weighting Model
- Baseline weights favor durable quality: balance sheet (15%), cash flow (12%), capital efficiency (10%), and margin durability (10%).
- Growth, valuation, and market position share 30% to balance upside with defensibility.
- ESG resilience and governance carry 8% to reflect long-horizon risk mitigation.
- Analyst overrides can tune weights ±5% per dimension; overrides are logged for auditability.
Normalization Pipeline
- Collect raw metrics and standardize to rolling five-year z-scores.
- Winsorize the top/bottom 2.5% outliers for stability.
- Scale each dimension to a 0–100 score using sector-specific percentiles.
- Apply weights, then blend into an overall score with confidence interval estimation.
Confidence Levels
- High (≥75%) — Data coverage is complete, signals are directionally consistent, and the model produced low variance across simulation runs.
- Medium (50–74%) — Some metrics required interpolation or conflicting signals increased model variance.
- Low (<50%) — Sparse data or high dispersion; treat directional calls as exploratory rather than investable.
Risk Interpretation
- Risk Level is calculated from downside deviation, liquidity stress tests, and valuation froth indicators.
- A rising risk level with stable quality implies resilience but shrinking margin of safety.
- High risk combined with low confidence flags names that need deeper analyst review before allocation.
Benchmarking & Peer Percentiles
- Sector Percentile compares each score to the company’s direct peer group, helping analysts spot outliers.
- Predicted Quality Change simulates next-quarter movement based on momentum signals and macro drivers.
- Combining percentile rank with predicted change surfaces improving franchises early.
Recommended Workflow
- Start with the overall grade to triage coverage lists.
- Review the dimensions scatterplot to spot strengths vs. drag factors.
- Check confidence and risk levels to size positions appropriately.
- Use predicted quality change to stage follow-up research or rebalance alerts.
Compliance & Data Sources (Snapshot)
- Fundamental data: Polygon.io, Alpha Vantage, and company filings.
- Market structure data: IEX Cloud and Tiingo streaming feeds.
- ESG overlays: MSCI sector composites and Sustainalytics summaries.
- Model assumptions reviewed quarterly; audit trail stored for regulatory review.