Disclaimer: I'm more of a passive investor with the vast majority of my wealth invested in diversified index funds. However, from time to time, I like to play with the idea of investing in individual stocks for speculation. Here, I'm figuring out how to identify "Mustachian companies."
1) Cash Flows
I look at cash flows as a proxy for earnings. While earnings may indicate how profitable the company is, cash flows are less likely to be manipulated. If possible, I look at Free Cash Flow (FCF). The closest analog to Free Cash Flow in your own personal finances is the money that's left over after all of your monthly recurring expenses are paid.
Instead of the popular "profit margins", I look at FCF to Revenues (as high as possible) and instead of the popular but misleading P/E ratio, I look at Price to Free Cash Flow (want it as low as possible but must be a positive number.)
2) Debt to Equity
MMM has been harping about avoiding as much debt as possible to minimize the financial strains we need to overcome in the long run. Although businesses tend to take out "good debt" (to grow their operations), too much of it can also spell trouble. I'd look for a D to E ratio of no more than 1, preferably as low as possible.
3) Mergers and Acquisitions
Although on paper, the synergies of mergers and acquisitions are a great asset for the combined company, in practice, many companies are weakened after they've merged or acquired with others. Usually the company dynamics change with the larger size and it becomes more difficult to manage which leads to lower revenues than expected. Too many mergers and acquisitions in a relatively short period would be a red flag.
Got any other crucial financial metrics that I've missed in finding Mustachian companies to invest in? Please share them here!