- States that if a company makes a profit of $1, it should reach the customer eventually
- It can reach the customer in any of the two ways:
- Dividend
- Retained earnings
- This reflects in the stock price
- If neither of the above happens, then its a Red Flag and the stock should not be considered
- This analysis should be done for all small and midcap companies
- IF the retained earnings does not reflect on the stock, it could also be because of a sector beating. So, before coming to a conclusion, check peer stocks across the sector.
- This may also be a segment issue (across Small/Mid cap)