Knowing the six gates is the beginning. Reading what they produce — and knowing what to do with it — is what separates a candidate from a conviction.
You now know the six gates. Revenue has to grow at the hurdle rate over five years and ten years. Net income has to grow at the hurdle rate over the same two timeframes. Debt-to-Equity has to stay below 1.0. No quarter of negative earnings in the last five years. And the trailing P/E has to be at or below the S&P 500’s long-run historical average.
In Part 2, we walked through why each gate exists. In this post, we’re going to look at what happens when you actually run a company through all six — and what the output tells you.
Because not all passing scores are equal. A company that clears every gate by a wide margin is a different animal from a company that barely squeezes through on five of six. Both passed. But one is a strong candidate and the other is a fragile one.
Learning to read the scorecard is what turns a mechanical screen into a real investment judgment.
What a Scorecard Looks Like
Let’s walk through a complete example.
The company below is illustrative — I’ve built the numbers to represent a genuinely strong growth profile. Call it SoftPath Systems. It makes enterprise software tools used by logistics companies. The product is sticky: once a company’s operations are built around it, switching costs — the practical and financial difficulty of changing to a different tool — are high.
Here’s what its scorecard looks like:
| Gate | Measurement | Result | Verdict |
|---|---|---|---|
| Revenue CAGR — 5 year | 16.4% | Above hurdle | ✓ Pass |
| Revenue CAGR — 10 year | 11.8% | Above hurdle | ✓ Pass |
| Net Income CAGR — 5 year | 19.2% | Above hurdle | ✓ Pass |
| Net Income CAGR — 10 year | 13.5% | Above hurdle | ✓ Pass |
| Debt-to-Equity | 0.28 | Below 1.0 | ✓ Pass |
| Negative earnings — last 20 quarters | 0 quarters | None | ✓ Pass |
| Trailing P/E vs. S&P historical avg | 15.8× vs. 16.5× | At/below avg | ✓ Pass |
Seven rows. Seven checkmarks. SoftPath clears every gate and the valuation check.
But look beyond the checkmarks for a moment. There’s more information here than “pass or fail.”
What the Numbers Are Actually Telling You
The growth is accelerating. Revenue grew at 11.8% over the past decade — but at 16.4% over just the past five years. That means the growth rate has been climbing, not slowing. The company isn’t just maintaining momentum. It’s building it. The same pattern shows up in net income: 13.5% over ten years, 19.2% over five. Earnings are growing faster than revenue — which means margins are expanding. The business is becoming more efficient as it grows. That’s the direction you want.
The balance sheet is conservative. A Debt-to-Equity ratio of 0.28 means for every dollar shareholders own in this company, lenders own 28 cents. That’s a very low amount of debt relative to the size of the business. This company could weather a difficult year, or two, without the balance sheet becoming a crisis. Financial breathing room matters most when the growth you’re counting on gets temporarily disrupted.
The earnings track record is clean. Zero negative quarters across twenty consecutive reports. That’s five years of consistent profitability — through whatever economic conditions the last five years brought. That track record doesn’t guarantee the future. But it shows that the business has been producing real profits, not just on paper, for long enough that we can trust the earnings numbers are real.
The valuation is reasonable — actually quite rare. A trailing P/E of 15.8× for a company growing earnings at 19% annually is a striking combination. The market is paying less for each dollar of earnings than it has historically paid for the S&P 500 as a whole. That almost never happens with genuine, fast-growing companies. Usually, if a growth company clears the first six gates, it doesn’t clear the P/E check — because the market has already priced in the growth. SoftPath, by this measure, is an unusual case.
That’s the scorecard well read. Not just the checkboxes — but what the pattern of numbers is saying about how the business is actually performing.
Passing With Room to Spare vs. Barely Passing
Now let’s look at a different company. Call it MidCore Holdings. It makes industrial software for mid-size manufacturers. Good product, loyal customer base, growing — but not with SoftPath’s momentum. Here’s its scorecard:
| Gate | Measurement | Result | Verdict |
|---|---|---|---|
| Revenue CAGR — 5 year | 10.3% | Above hurdle | ✓ Pass |
| Revenue CAGR — 10 year | 9.8% | Above hurdle | ✓ Pass |
| Net Income CAGR — 5 year | 10.1% | Above hurdle | ✓ Pass |
| Net Income CAGR — 10 year | 9.4% | Above hurdle | ✓ Pass |
| Debt-to-Equity | 0.88 | Below 1.0 | ✓ Pass |
| Negative earnings — last 20 quarters | 0 quarters | None | ✓ Pass |
| Trailing P/E vs. S&P historical avg | 16.1× vs. 16.5× | At/below avg | ✓ Pass |
Seven checkmarks again. MidCore passes.
But compare the two scorecards side by side, and the difference is obvious.
SoftPath grows revenue at 16.4% over five years. MidCore grows at 10.3%. Both are above the hurdle — but SoftPath is clearing it by six percentage points. MidCore is clearing it by one. A single difficult year could knock MidCore’s five-year CAGR below the hurdle. SoftPath has far more cushion.
SoftPath’s growth is accelerating. MidCore’s is flat. SoftPath’s five-year rate (16.4%) is well above its ten-year rate (11.8%). MidCore’s rates are nearly identical — 10.3% vs. 9.8%. MidCore is growing at a steady pace. SoftPath is speeding up.
SoftPath carries almost no debt. MidCore is close to the ceiling. A Debt-to-Equity of 0.88 means MidCore has borrowed 88 cents for every dollar of equity. It passes the gate, but barely. It doesn’t have much room to absorb bad news. An acquisition, a down year, or rising interest rates could push that number above 1.0 and remove the company from the candidate list entirely.
Both companies passed the screen. But they are not equivalent investments. SoftPath has high conviction behind it. MidCore passed — but with very little margin for error.
This is what “reading the scorecard” means. The gate is binary: pass or fail. The number behind the gate is a spectrum. A passing score that barely clears the bar deserves more skepticism than one that clears it easily.
The Trailing P/E Check — What It’s Really Measuring
The valuation check deserves its own section because it works differently from the other six gates.
The first six gates look backward. They ask: what has this company actually done over the past five and ten years? A company either grew at the hurdle rate or it didn’t. There’s no ambiguity.
The trailing P/E check looks at a relationship: how much is the market currently charging for this company’s earnings?
Trailing P/E — the price-to-earnings ratio calculated using the last twelve months of actual earnings, not projections — is the simplest summary of what investors are paying per dollar of profit. If a stock is at $80 and the company earned $4 per share over the past year, the trailing P/E is 20. You’re paying $20 for every dollar the company earns annually.
The benchmark is the S&P 500’s long-run historical average P/E — roughly 15 to 17, depending on the period you measure. Companies that trade at or below this average are, by the market’s own historical standards, priced reasonably.
Here’s why this matters for a growth investor specifically.
Growth stocks almost always trade at premiums. The market knows a 19%-per-year earnings grower is more valuable than a 5%-per-year grower, so it charges more per dollar of current earnings — because future earnings will be much larger. That’s rational. That premium is usually justified.
But when that premium gets very large — when investors are paying 50 or 80 times earnings for a company they believe will keep growing fast — a lot of optimism is already baked into the price. If the growth rate slips even a little, the multiple can collapse, and the stock falls hard even though the business is still growing. That’s multiple compression — when a high expectations multiple comes back down to earth.
The P/E gate defends against this. It says: no matter how strong the growth metrics look, we are not going to pay a price so far above the historical average that we’re buying nothing but optimism.
Most growth stocks that clear the first six gates fail the P/E check. That’s normal. The screen is meant to be selective. A company growing earnings at 20% per year that is also trading below the S&P’s historical average P/E is a rare opportunity. When you find it, the scorecard is worth taking seriously.
When a company passes the first six gates but fails the P/E check, the right move is simple: put it on a watch list. Monitor it. Wait for the price to come down, or for earnings to grow enough that the multiple naturally contracts to the point where it clears the gate. Patience is not the same as inaction.
The Scorecard Is a Starting Point, Not a Finish Line
One last thing to understand about what the scorecard does — and what it doesn’t do.
Clearing all six gates and the P/E check earns a company a place on your candidate list. It does not mean you should buy it tomorrow.
What the screen tells you is this: here is a company with a demonstrated track record of growing revenue and earnings consistently, financed conservatively, without a losing period, at a price the market has not yet bid up to an unreasonable premium.
What the screen does not tell you is why the growth happened, whether it will continue, or whether there’s a risk the market hasn’t priced in yet.
That’s where your own research begins. A passing scorecard is the reason to look harder — to read the annual reports, to understand what the business actually does, to figure out why it has grown at this pace and whether the conditions that produced that growth are still in place.
The Six Gates find candidates. Your judgment, informed by that deeper look, determines which candidates deserve to become investments.
A Note to Luca and Lili
I want to tell you something about the P/E check — because it can feel frustrating.
You’ll go through the exercise of running a company through all six growth gates. You’ll feel the satisfaction of watching the checkmarks accumulate. Revenue: pass. Net income: pass. Debt: pass. Earnings record: clean. And then you’ll hit the trailing P/E, and the stock trades at 35 times earnings when the historical average is 16. Fail.
The screen says no. You might think: but the growth is so clearly there. Doesn’t the high multiple just mean other investors agree with me?
Sometimes. But think about what you’re actually doing when you pay 35 times earnings for a stock. You’re paying, in advance, for more than two decades of earnings at the average market rate. Everything the company earns over the next twenty years — assuming it stays at this level forever — is already priced into today’s share price. Nothing is left for you to gain.
If the growth continues at 19% annually, the multiple will eventually compress on its own as earnings grow into the price. You’ll make money — but you’ll have paid for the privilege upfront.
If the growth slows, even modestly, you lose twice: slower earnings and a lower multiple. That’s the trap.
The P/E check exists to keep you from paying for something you haven’t earned yet. It says: wait for a price where you have a real chance at a real return. Most of the time, waiting is the right answer.
— Papa
The One-Sentence Summary
A passing growth scorecard means a company has cleared six hard gates — sustained revenue and net income growth at both five- and ten-year timeframes, conservative debt, a clean earnings record — and the market has not yet bid the price up to a level where all the growth is already priced in.
← Part 2: The Six Gates | Part 4: When to Sell and Why →
— Jim