Quality and valuation: the Lubin method separates them — here is why
2026-06-22 · By Lubin Danilo, founder of Lubin Investment
The Lubin method deliberately separates two questions: is this a quality business? And only then: is the price reasonable? By keeping these two steps independent, you avoid the most common trap in investing — paying for quality you have not verified, or missing cheap quality because the stock price looks high.
- Step 1: the quality score (0 to 10) measures business soundness, independent of the stock price.
- Step 2: the price-to-free-cash-flow ratio measures what you pay, independent of perceived quality.
- A perfect quality score is not enough: Shopify trades at a price-to-free-cash-flow ratio of 85 — demanding.
- A low price-to-free-cash-flow ratio is not enough either: Nike at 196 times with a quality score of 3 is still a trap.
- Only the combination of both steps enables a disciplined and repeatable decision.
The problem: when quality and price get mixed together
Many fundamental investment approaches build a composite score that blends profitability, growth, valuation, and balance sheet into a single number. The intention is good: simplify the decision. But the result is often misleading. A mediocre company sold very cheaply can score high, just as an elite overpriced company can. The mix blurs the signals exactly where clarity matters most.
The Lubin method: two steps, two distinct questions
The Lubin method enforces a strict order. First, a single question: is this a good business? That assessment runs through ten concrete financial criteria — profitability, revenue and free cash flow growth, cash margin, return on capital, balance sheet strength, share buybacks. Each criterion earns one point. The result is a quality score between 0 and 10.
Only once that score is set — independently of any price consideration — does the second question enter the picture: is now the right time to buy? That is where the price-to-free-cash-flow ratio comes in: the share price divided by annual free cash flow per share. This ratio tells you how many years of cash you are paying for today. The lower it is, the cheaper it is.
Four real examples
| Company | Quality score | Price-to-free-cash-flow | Reading |
|---|---|---|---|
| Qualys (QLYS) | 10 / 10 | 18 × | Quality confirmed, reasonable valuation |
| Kinsale (KNSL) | 10 / 10 | 7 × | Top quality and attractive price — rare combination |
| Shopify (SHOP) | 10 / 10 | 85 × | Top quality, very demanding valuation |
| Nike (NKE) | 3 / 10 | 196 × | Neither quality nor price — a double trap |
Kinsale Capital shows the rarest combination: a perfect quality score and a price-to-free-cash-flow ratio below its sector median. Two steps, two green lights.
Why the order matters as much as the numbers
If you look at price before quality, you risk rationalising. The Lubin method enforces the reverse order: you must love the business before opening the calculator. This simple discipline makes decisions less emotional, more repeatable, and easier to defend when markets turn volatile.
FAQ
Why separate quality and valuation into two steps?
Because blending them into a single composite score blurs the signals. Separating the steps forces you to answer two distinct questions, in the right order.
Is a perfect quality score enough to invest?
No. Shopify has a perfect quality score and a price-to-free-cash-flow ratio of 85 times. Both steps must be cleared.
Is a very low price-to-free-cash-flow ratio always a bargain?
No. Nike trades at 196 times its free cash flow with a quality score of 3 out of 10. That is precisely why Step 1 always comes before Step 2.
How is the quality score calculated in the Lubin method?
Across ten concrete financial criteria: profitability, revenue and free cash flow growth, cash margin, return on capital, balance sheet discipline, share buybacks. Each validated criterion earns one point. The score runs from 0 to 10.
What combination does the Lubin method look for?
A high quality score AND a reasonable price-to-free-cash-flow ratio. Kinsale Capital, with a perfect score and a ratio of 7 times, is the textbook example.
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About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).