Balanced stock scoring: no weak link

A plain average lets a great result in one area cancel out a poor one in another. A very cheap stock with weak profitability and a very profitable stock that is overpriced can both average out to a respectable score.

A geometric mean behaves differently. It multiplies the scores and takes a root, so a low score drags the result down far more than it would a plain average. The same idea is used elsewhere to stop strength in one area from fully covering for weakness in another: the United Nations Human Development Index, for example, has combined its components with a geometric mean since 2010.

1. Score each metric 0–100 exactly as in weighted ranking, by position among the stocks that pass your filters.
2. Group the metrics into areas (valuation, profitability, growth, financial health, dividends and price trend) and average the scores within each area using your weights.
3. Combine the areas with a weighted geometric mean. Each area counts in proportion to the total weight of its metrics. An area score below 1 is treated as 1 so the calculation stays defined.

In symbols, the score is the weighted geometric mean of the area scores: the exponential of the weighted average of their natural logarithms. When every metric sits in one area, there is only one area score, so the result equals the weighted ranking score.

Assume each company has one metric in each of three areas, with equal weights, and the metric scores below. The figures are made up for illustration.

Both companies average 60, so weighted ranking scores them the same. Company A's Balanced score is the cube root of 90 × 30 × 60, which is about 54.5. Company B's is the cube root of 60 × 60 × 60, exactly 60.0. The weak profitability result costs A about 5.5 points.

With just two areas the effect is clearer: scores of 90 and 30 average 60 but combine to about 52. The score describes position among the peers; it is not a forecast of a company's return.

1. Choose Balanced (no weak link) in the scoring-model picker.
2. Select metrics from more than one area, for example a valuation measure, a profitability measure and a growth measure, and set their weights.
3. Open a stock's breakdown to see each metric's score and its share of the total.

As in weighted ranking, a stock needs complete data for every metric you score, at least ten stocks are needed, and you can compare each stock within its own sector (a sector with fewer than five eligible stocks falls back to the whole list). See the full methodology.

• It only guards the areas you score. A weakness in something you did not select is invisible to the model.
• It can penalize deliberate trade-offs. A fast-growing company may be unprofitable by design and will score lower here.
• The areas are fixed. How many metrics you put in an area changes how much that area counts.
• Scores are relative. Each stock is compared with the stocks that pass your filters.

Stock Meadow's scores are research tools based on reported financial data. They do not predict returns or recommend buying a particular stock. To compare with a plain average, read the weighted ranking guide.

Each measure has its own page with a formula, how to read it and common pitfalls.

• P/E Ratio (Price-to-Earnings): what you pay for each dollar of profit.
• Return on Invested Capital (ROIC): profit made on all money invested in the business.
• Revenue Growth: how fast sales grew last year.
• Net Debt to EBITDA: years of earnings needed to pay off debt.

What is a geometric mean and why use it for stock scores?

A geometric mean multiplies the values together and takes a root, instead of adding them. A low value pulls it down much more than it pulls down a plain average, so one weak area cannot be hidden by strengths elsewhere.

When does Balanced give the same result as weighted ranking?

When all the metrics you score belong to one area, such as valuation only. The model only differs from weighted ranking when your metrics span more than one area.

What are the areas in the Balanced model?

The areas are the metric groups: valuation, profitability, growth, financial health, dividends and price trend. Each metric belongs to one of them.

Will Balanced stop me picking a risky stock?

No. It reduces the score of stocks that are weak in any area you score, but it only knows the metrics you chose. A risk you did not score is not penalized.