Intrinsic Value Framework

How to Use Intrinsic Value Framework to Find Good Cyclical Businesses?

This post has been written by Nikhil Gangil. You can follow him on Twitter here. Visit his website here.

Are you familiar of these words – “Buy good stock and sleep”, “Buy good stock in every dip”, “Do Opportunistic SIP in good stocks”?

I am sure you must be. But what are the parameters of a good business?

Is a good business, a good investment too?

And at the end should we take people’s word for it or should we look at the data and decide for ourselves?

Well, the definition of a good investment can vary from person-to-person.

One may say the Growth of a company is Primary. While others may say Quality (performance). For some, Valuations are supreme.

In 2018, I decided to find answer to this question myself.

I took last 10 years data from various financial websites and back-tested all the data points I could find against the performance of stock price for the 10-year period.

I didn’t stop there. Along with back-testing, I did the forward-testing for next 3 years. In 2021, when I found it to be working continuously through thick and thin of market, I made it as one of my main framework for investing.

Today, at Intrinsic Value, we start our primary Hunt to find Multibaggers using this framework.

Starting my study from ground zero, I took the following basic parameters and checked the last 10 year stock returns against them.


Growth Quality Valuation
1.       Capex growth


2.       Sales growth

3.       Profit growth

4.       Cash flow growth

1.       ROCE


2.       ROE

3.       ROA

1.       P/E


2.       P/S

3.       P/B

4.       P/CF


Moreover, some other parameters like Promoter Holding, Debt/Equity, Equity Capital, and Current Ratio were also made part of this study.

I plotted more than 300 data charts out of which I will be sharing the significant ones in this post.


Sales Growth vs. 10Y CAGR Returns

Sales Growth vs. 10Y CAGR


This plot is setting a very good tone. As the Sales are growing, the 10-year CAGR is growing too. If you look at the chart below, the Win areas are highlighted in Green. But clearly, this is not an accurate indicator as a lot of -ve Sales Growth companies have done pretty well too and a lot of good Sales Growth companies have underperformed too. Missed areas are highlighted in Red.



Wins & losses highlighted on the chart


ROCE% vs 10-year CAGR Returns

The quality or performance of a company is what is considered the most important aspect of any financial study.

ROCE vs 10 Year CAGR


Again, a very good indicator with a lot of blind spots. Spots where ROCE is high, but returns are not, and Returns are high despite having less ROCE are highlighted.

Wins & losses highlighted on the chart

Below are the other indicators with their wins and loses highlighted.


Profit Growth vs CAGR

Profit Growth vs 10 Year CAGR


P/E ratio vs CAGR

P/E ratio vs 10-year CAGR

I compared 30-40 such parameters but I am only reporting the good ones (Reasonable Green area)




How Magical is Magic Formula?

Some of you might know a famous value investor Joel Greenblat.

He used a fusion of Quality and Valuation (magic formula).

His ranking system works as following

  1. Rank all the companies based on their ROCE (The higher the ROCE better the rank)
  2. Rank all the companies based on EV/EBIDTA (Lower the EV/EBIDTA better the rank)
  3. Add both ranks, Pick the top ones, do your due diligence and Buy them.

For illustrative purpose, if I wish to rank 100 Capital goods companies according to magic formula this is how it will look like –



Shown below is the Magic formula vs 10-year CAGR returns for all the stocks:


Rank vs CAGR%


One of the best things I found about the ranking systems is that you don’t have to care about low-ranking companies and their performances.

You only need to worry about the top 100 (or 150) and their performances.

Although I can see some of the low-ranking stocks giving 40%+ CAGR also in above plot, I will only focus on the one I would have bought because of better ranking.

I can see that if I would have bought based on this formula, I would have the least amount of losers in my portfolio and some great wealth creators too.

But let’s face it, we are creating these plots in Hindsight and Estimating future Growth/Quality and returns are next to impossible, so an intelligent value investor takes a great amount of margin of safety. Thus, our end goal is to reduce the Red highlighted portion close to zero.

Thus, what can be the other combinations to rank companies and get better opportunities?


Growth + Quality

I did such 80-90 combinations where I put 4 growth parameters with 3 quality and 4 Valuation parameters (shown in start of article) in pair of 2s and then 3s to get better picture.




Intrinsic Value Framework

One combination that intrigued me was:

  1. Sales growth
  2. ROCE
  3. P/B ratio

Results were excellent. Not only 95% of the stocks beat the market but also 50% of them were above 40% CAGR. The top 50 stocks average CAGR was 37%.



If I add a secret ingredient called Due diligence, the Average returns turn out to be at 40.7% CAGR.

40.7% CAGR means 1 lac invested in this PORTFOLIO 10 years back would be 30.4 Lacs today, Portfolios giving Such returns are extraordinary.



As I have already mentioned these are charts made in Hindsight, a value investor does not rely on Back-testing results.

So, I decided to forward test it for the next 3 years in 2018.

I extracted the below data and started my ranking.

  • 3-year Sales Growth
  • 3-year ROCE
  • PB Ratio

The CAGR of the first 50 stocks is 73%.



To put it in a 15 min understandable infographic, below became my Intrinsic Value Framework over the time:



As a bonus, Nikhil has automated this process of ranking of stocks within a sector. You can visit his website and access the automated rankings of stocks for free.


One may point out, these returns include the last 2 years bull market’s return, the whole market has performed well in the last 2 years so why these returns should be considered significant.


  1. The Whole market has performed well in the last 2 years but remember, this is a comparative study. In the last 3 years, the Nifty is up by 17.5% CAGR and these stocks are up by 73% CAGR so even if the market doesn’t give any returns over the next 2-3 years, expecting 15-18% would not be asking too much.
  2. Longevity– this has been performed over a long period, not many methods of investing do that except value investing.
  3. In a down market like 2018-2019 also companies with good ranking worked better than the rest. Beating the market in a Bear market is what separates winners from losers.
  4. Market goes up and down, how much our portfolio performs matters in the end. So if you have a better strategy you are free to use that one.


You can and you should collect data and verify this method for the last 10 years yourself before going forward which will help building your conviction.



  1. Studies showing big returns and getting big returns are two different things, not only market returns depend on knowledge, due diligence but also on execution of the strategy. A good value investor always targets the best and keeps his expectations low.
  2. As you can see in the charts above also, we have considered stocks that have given more than 12-13% as outperformers. The reason is Nifty50 has given 12% returns in the last 10 years. It will only make sense to put such efforts into the market if we can beat this return by at least 5-7%.
  3. Fundamental investors always assume that stock price surge comes after good results, but a lot of times price fluctuation come before Quarterly and annual results so you will only make above huge CAGR if you remain invested through thick and thin of company for years. (stock price wise)

This post has been written by Nikhil Gangil. You can follow him on Twitter here. Visit his website here.

Cover Image Credits – The College Investor

Nikhil Gangil
Nikhil Gangil is a SEBI-registered Research Analyst. He is an IIT Madras Alumunus and the founder at Intrinsic Value Equity Research.
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