How Professional Investors Screen Stocks: The Five-Metric Framework Explained (CROCI, PEG, Sortino, Sharpe, Calmar)

Professional investors screen stocks using a small set of numbers that measure quality, value and risk-adjusted performance, and the five that do the heaviest lifting are CROCI, the PEG ratio, the Sortino ratio, the Sharpe ratio and the Calmar ratio. Together they answer three questions that decide whether a company deserves your capital: does the business generate real cash returns, are you paying a sensible price for its growth, and has the share rewarded investors well relative to the pain it inflicted along the way. This article explains each metric in plain English, gives the working thresholds used in the Great Investments Programme, and shows how to combine them into a repeatable screen for your ISA, SIPP or general investment account.

Most private investors never get this far. They buy on a tip, a headline, or a chart that has already gone up, which is precisely why the S&P Dow Jones SPIVA scorecards keep finding that the majority of professionally managed active funds underperform their benchmark over ten-year periods (the exact percentage varies by region and period, so check the latest SPIVA report for the current figure).

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If the professionals with Bloomberg terminals struggle, the self-directed investor's edge cannot come from information. It has to come from discipline, and discipline means a checklist of numbers applied the same way every time.

That is what this framework is. I used a version of it managing money professionally, I taught it during my time as a Visiting Fellow in business at Corpus Christi College, Oxford, and it sits at the core of the Great Investments Programme today. None of it requires a maths degree. It requires knowing what each number means, where its blind spots are, and refusing to buy anything that fails the screen no matter how exciting the story sounds.

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Why Five Metrics, and Why These Five

A useful screen needs to measure three different things, because companies fail investors in three different ways. A business can be genuinely excellent yet priced so high that returns are poor for a decade. A share can be cheap because the underlying business quietly destroys capital. And a stock can deliver a handsome average return while subjecting its holders to drawdowns so violent that most sell at the bottom. Quality, valuation and risk-adjusted performance are separate axes, and a metric that captures one tells you almost nothing about the other two.

CROCI covers quality. The PEG ratio covers valuation relative to growth. Sortino, Sharpe and Calmar cover risk-adjusted performance from three different angles: total volatility, downside volatility only, and worst-case drawdown. Five numbers sounds like a lot until you realise that most investors use zero, and that each one exists to catch a failure mode the others miss. A stock that clears all five hurdles is rare, which is rather the point.

The framework deliberately excludes some famous numbers. The plain P/E ratio is absorbed into PEG, which is more informative. Dividend yield is excluded because a high yield is as often a warning as an attraction. And momentum, which the Great Investments Programme does use, sits in a separate stage of the process because it answers "when" rather than "what".

Metric 1: CROCI, the Quality Test

CROCI stands for Cash Return on Capital Invested, and it measures how much real cash a company generates each year for every pound of capital tied up in the business. The methodology was developed at Deutsche Bank's equity research operation in the 1990s (Pascal Costantini, who led much of that work, later set out the approach in a book listed in the sources below). The insight behind it is that accounting profits are an opinion while cash is a fact. Reported earnings can be flattered by depreciation assumptions, provisioning choices and one-off adjustments, whereas the cash flowing through a business is far harder to dress up.

Think of CROCI as the interest rate the business itself pays on the money invested in it. A company with a CROCI of 12 per cent turns every £100 of invested capital into £12 of cash return annually, before the market's mood, the news cycle or the share price enter the picture. Compare that with the company's cost of capital, typically somewhere near 7 to 9 per cent for a large listed business (approximate, and it varies with interest rates), and you can see immediately whether the business creates or destroys value. A firm earning cash returns below its cost of capital is running to stand still, however impressive its revenue growth looks.

The working threshold in the Great Investments Programme is straightforward: favour companies whose CROCI comfortably exceeds their cost of capital, and treat a figure sustained above roughly 10 per cent across several years as the mark of a genuinely superior business.

Consistency matters more than any single year. A company that has produced double-digit cash returns through a rate cycle and a recession is telling you something about the durability of its competitive position that no forecast can.

The blind spot: CROCI says nothing about price. Wonderful businesses are usually expensive, and paying any price for quality is how investors lost money on excellent companies in 2000 and again in 2021. That is why the second metric exists.

Metric 2: PEG, the Price-for-Growth test

The PEG ratio divides a company's price-to-earnings ratio by its expected earnings growth rate, and it answers the question the plain P/E cannot: is this price sensible given how fast the business is growing. A P/E of 30 sounds expensive and a P/E of 10 sounds cheap, yet a company growing earnings at 40 per cent a year is arguably a bargain at 30 times earnings, while a shrinking business is dear at 10 times. Dividing price by growth puts fast and slow growers on the same scale. The measure was popularised by the Fidelity fund manager Peter Lynch in his 1989 book One Up on Wall Street, where his rule of thumb was that a fairly priced company trades at a PEG of about 1.

The arithmetic is simple. A share on a P/E of 20 with earnings expected to grow at 20 per cent a year has a PEG of 1.0. The same P/E with 10 per cent growth gives a PEG of 2.0, meaning you are paying twice as much per unit of growth. In the Great Investments Programme the working preference is a PEG below 1, with anything under roughly 0.75 flagged for closer inspection, because the market occasionally misprices growth and those mispricings are where outsized returns hide.

Handle PEG with care, because its denominator is a forecast. Analyst growth estimates are routinely too optimistic, particularly for glamorous sectors, so a low PEG built on a heroic growth assumption is a trap rather than a bargain. The practical defence is to sense-check the growth figure against the company's own history: if a firm has grown earnings at 8 per cent a year for a decade, be sceptical of a forecast assuming 25 per cent. PEG also behaves badly for cyclical companies at the top of their cycle, when earnings are peaking and the ratio looks deceptively cheap.

Used alongside CROCI, though, PEG becomes powerful. High cash returns tell you the growth is likely to be profitable growth; a low PEG tells you that profitable growth is not yet fully in the price. That combination, quality at a reasonable price, is the engine of the whole framework.

Metric 3: The Sharpe Ratio, Return Per Unit of Total Risk

The Sharpe ratio measures how much return an investment has delivered above the risk-free rate for each unit of volatility it made you endure. It was introduced by the Nobel laureate William F. Sharpe in a 1966 paper in the Journal of Business (he originally called it the reward-to-variability ratio, and refined the measure in a 1994 Journal of Portfolio Management article). The calculation takes the investment's return, subtracts what you could have earned in something essentially riskless such as short-dated government bills, and divides the excess by the standard deviation of returns.

The intuition is that return alone is a meaningless number. Two funds both returning 10 per cent a year are not equivalent if one glided there smoothly while the other swung between +40 and -25. Volatility is the price you pay in sleepless nights and, more damagingly, in the temptation to sell at exactly the wrong moment. The Sharpe ratio prices that cost. A Sharpe of 1.0 means one unit of excess return per unit of volatility, which is genuinely good; sustained figures above 2 are rare outside marketing documents and deserve suspicion as much as admiration.

For screening individual shares and funds, the working convention in the Great Investments Programme is to favour a Sharpe ratio above 1 measured over a multi-year period, and to compare candidates against each other rather than treating any single figure as gospel. Sharpe ratios move with the market regime: in a strong bull year most equities look brilliant on this measure, so the fair comparison is always against peers over the same window.

One caution belongs here. Because Sharpe uses returns that are historical, it describes the road already travelled rather than the road ahead. Treat it as evidence about how a company's shares behave, in the same way an insurer treats a driver's claims history: informative, not prophetic.

Metric 4: The Sortino Ratio, Punishing Only the Downside

The Sortino ratio is the Sharpe ratio's sharper sibling, and the difference is philosophical as much as mathematical. Sharpe penalises all volatility, including the upside kind, yet no investor has ever complained about a share price rising too quickly. The Sortino ratio, developed through the work of Frank Sortino at the Pension Research Institute (the underlying downside-risk framework was set out in a 1991 Journal of Portfolio Management paper by Sortino and van der Meer), divides excess return by the standard deviation of negative returns only. Only the months that hurt count against the score.

This distinction matters most for exactly the kind of stock a growth investor wants to own. A company whose shares lurch upward in irregular bursts, flat for months and then up 30 per cent on results, gets punished by the Sharpe ratio for behaviour shareholders love. The Sortino ratio recognises that pattern for what it is. Conversely, a share with modest headline volatility but a habit of sudden air pockets scores worse on Sortino than Sharpe, which is precisely the warning you want.

The working thresholds run slightly higher than Sharpe because stripping out upside volatility shrinks the denominator: a Sortino above 1 is acceptable, above 2 is strong, and the most useful signal is often the gap between a stock's Sortino and its Sharpe.

A large gap means the volatility is mostly the good kind. A Sortino barely above the Sharpe means the turbulence is symmetrical and you should size the position accordingly.

In the Great Investments Programme, Sortino carries more weight than Sharpe for individual growth shares, while Sharpe remains the fairer yardstick for diversified funds. Use both and the two numbers start to describe the personality of an investment, which is more than most investors ever learn about what they own.

Metric 5: The Calmar Ratio, The Worst-case Test

The Calmar ratio divides an investment's annualised return by its maximum drawdown, the largest peak-to-trough fall it has suffered over the measurement period. The measure was introduced by Terry W. Young in a 1991 article in Futures magazine, the name deriving from his firm's newsletter, California Managed Accounts Reports. Where Sharpe and Sortino average risk across every month, Calmar asks a blunter question: at the very worst moment, how much of your money had vanished, and was the long-run return worth that experience.

This is the metric that speaks most directly to real investor behaviour. Academic risk measures assume you hold serenely through everything, but two decades of watching private investors tells me the maximum drawdown is where plans go to die. A portfolio that falls 55 per cent needs a 122 per cent recovery just to break even, and very few people sit through the first half of that arithmetic without selling. If you are drawing an income from a SIPP, a deep drawdown early in retirement compounds the damage, because withdrawals crystallise losses that paper portfolios would have recovered.

The working convention: for individual equities and equity funds, a Calmar ratio above roughly 0.5 over three to five years is reasonable and above 1 is strong, meaning the annualised return has at least matched the worst fall along the way. As with Sharpe, compare like with like over identical periods, because a window that excludes 2020 or 2022 flatters everything in it.

Calmar completes the risk picture the other two ratios begin. Sharpe measures the everyday bumpiness, Sortino isolates the harmful bumps, and Calmar records the single worst episode. A stock that scores well on all three has demonstrated, through actual market history, that it rewards its holders without breaking them.

Putting The Five Together: A Worked Example

Consider two hypothetical UK-listed companies, both trading on a P/E of 18, both with enthusiastic broker coverage. Alpha Engineering has a CROCI of 13 per cent sustained over five years, forecast earnings growth of 15 per cent (PEG 1.2), a five-year Sharpe of 0.9, a Sortino of 1.7 and a Calmar of 0.8. Beta Retail has a CROCI of 6 per cent, forecast growth of 22 per cent (PEG 0.8), a Sharpe of 0.7, a Sortino of 0.8 and a Calmar of 0.3. On the numbers most investors look at, Beta is the more exciting story: faster growth, cheaper on PEG, and probably the better-performing share over the past six months.

The framework reads them differently. Beta's cash returns sit below any plausible cost of capital, so its rapid growth is likely consuming value rather than creating it, and its near-identical Sharpe and Sortino with a weak Calmar reveal symmetrical turbulence punctuated by at least one severe collapse. Alpha's PEG of 1.2 is slightly above the preferred threshold, which is a genuine mark against it, but every other reading describes a high-quality business whose volatility is predominantly the upside kind. Neither is a mechanical buy. Alpha earns a place on the watchlist for a better entry price; Beta fails the screen outright, however good the narrative.

That is the discipline in practice. The screen does not promise winners, and nothing in investing can. What it does is systematically remove the category of stock responsible for most private-investor losses: the exciting, low-quality, drawdown-prone share bought on a story.

Applying the Framework in Your ISA, SIPP, or Beyond

For UK investors the natural home for a screened portfolio is the stocks and shares ISA and the SIPP, where gains and income compound free of tax (remember that from April 2027 the cash ISA allowance falls to £12,000 for under-65s, which will push more savers toward exactly this kind of investing whether they feel ready or not). The same framework transfers directly to a US 401(k) or IRA, an Australian Super fund with a self-directed option, or a Canadian RRSP, because the five metrics measure properties of businesses and securities rather than anything specific to UK tax wrappers.

Practically, run the screen quarterly rather than daily. CROCI and PEG change with results and forecasts, not with the news cycle, and the three risk ratios need multi-year windows to mean anything. Most decent platforms and free screeners publish P/E and growth forecasts; Sharpe and maximum drawdown data are available for funds on Morningstar and similar services; CROCI and Sortino usually require either a paid data service or calculating from published accounts and price history, which a spreadsheet handles comfortably once set up. The FAQ below covers data sources in more detail.

One final principle: the framework is a filter, never a substitute for understanding what a company does. Every number here can be temporarily distorted, by an acquisition, an accounting change, or a data error. The screen earns its keep by shrinking a universe of thousands of shares down to a few dozen worth your actual attention.

Frequently asked questions

What is a good CROCI figure when screening stocks in 2026?

A good CROCI comfortably exceeds the company's cost of capital, and with large-cap costs of capital sitting somewhere near 7 to 9 per cent in the current rate environment (approximate, and worth verifying against a current source), a sustained CROCI above roughly 10 per cent marks a genuinely strong business. The word sustained is doing the work in that sentence. One good year proves little, whereas five years of double-digit cash returns through varied conditions is evidence of a durable competitive advantage. Be more demanding of capital-light sectors such as software, where high cash returns are common, and slightly more forgiving of capital-intensive ones such as utilities.

Is a PEG ratio below 1 always a buy signal for UK stocks?

No. A PEG below 1 means the market is charging less than one unit of P/E per unit of forecast growth, which is attractive only if the forecast is believable. Cyclical companies near peak earnings often show deceptively low PEGs just before profits roll over, and analyst estimates have a well-documented optimistic bias. Treat a sub-1 PEG as an invitation to investigate rather than a conclusion, and always cross-check the growth assumption against the company's own ten-year record. A low PEG on a business that also passes the CROCI test is a far stronger signal than a low PEG alone.

Should I use the Sharpe ratio or the Sortino ratio for my ISA or SIPP portfolio?

Use both, because they answer different questions. Sharpe is the fairer measure for diversified funds and for comparing your whole portfolio against an index, since broad portfolios tend to have roughly symmetrical returns. Sortino is more informative for individual growth shares, whose volatility is often concentrated on the upside, and the gap between the two ratios tells you whether a holding's turbulence is the kind that builds wealth or the kind that destroys sleep. If you only track one number for your overall SIPP or ISA, make it Sharpe over rolling three-year periods; if you are selecting individual shares, weight Sortino more heavily.

What is a good Calmar ratio for a self-directed investor?

For equities and equity funds measured over three to five years, a Calmar ratio above roughly 0.5 is reasonable and above 1 is strong. A Calmar of 1 means the investment's annualised return has matched the worst peak-to-trough fall it inflicted, which most long-term holders can live with. The ratio matters most for anyone drawing an income from their portfolio, because deep drawdowns combined with withdrawals do damage that averages conceal. Always compare Calmar ratios over identical time windows, since a period that happens to exclude a bear market flatters every investment inside it.

Can I use the five-metric framework for funds and ETFs in my SIPP, 401(k) or Super?

Yes, with one adjustment. Sharpe, Sortino and Calmar apply directly to funds and ETFs, and fund fact sheets and services such as Morningstar publish much of the underlying data. CROCI and PEG are company-level measures, so for a fund you either examine the weighted characteristics of its largest holdings or substitute fund-level equivalents such as the portfolio's average return on capital and price-to-earnings relative to growth. The framework works identically inside a UK ISA or SIPP, a US 401(k) or IRA, an Australian Super fund or a Canadian RRSP, because the metrics describe the investments rather than the wrapper around them.

Where can private investors find CROCI, Sortino and Calmar data without a Bloomberg terminal?

Standard P/E and forecast growth figures, and therefore PEG, are free on most platforms and screening sites. Sharpe ratios and maximum drawdown figures for funds appear on Morningstar and on many platform fact sheets, and maximum drawdown for individual shares can be read directly from a long-term price chart. True CROCI figures are hardest to source because the full methodology is proprietary to its originators, so private investors typically use free cash flow return on invested capital as a close practical substitute, calculated from the cash flow statement and balance sheet. Sortino and Calmar can both be computed in a spreadsheet from monthly price data, and building that spreadsheet once is a genuinely worthwhile afternoon.

Sources and further reading

• Sharpe, W.F., "Mutual Fund Performance", Journal of Business, 1966; and "The Sharpe Ratio", Journal of Portfolio Management, 1994

• Sortino, F. and van der Meer, R., "Downside Risk", Journal of Portfolio Management, 1991

• Young, T.W., "Calmar Ratio: A Smoother Tool", Futures magazine, 1991

• Lynch, P., One Up on Wall Street, Simon & Schuster, 1989

• Costantini, P., Cash Return on Capital Invested, Butterworth-Heinemann, 2006

• S&P Dow Jones Indices, SPIVA Scorecards (spglobal.com/spdji) for active fund performance data

• Financial Conduct Authority (fca.org.uk) for regulatory context on retail investing

• Morningstar (morningstar.co.uk) for fund-level risk and performance data

If any figure in this article will inform a real decision, verify it against the primary source first; markets move and data services differ in their calculation windows.

About the author. Alpesh Patel OBE is a former hedge fund manager, author of 18 books on investing including titles for the Financial Times, a former Bloomberg TV presenter, and a former Visiting Fellow in business at Corpus Christi College, Oxford. He was awarded the OBE for services to the economy. He runs the Great Investments Programme at campaignforamillion.com, teaching self-directed investors the quantitative methods used by professionals.

Important information. This article is financial education, not a personal recommendation. It does not take account of your circumstances, and the value of investments can fall as well as rise, so you may get back less than you put in. Past performance, including every ratio discussed above, is a record of what happened rather than a promise of what will. Tax treatment of ISAs, SIPPs and their international equivalents depends on individual circumstances and may change. If you are unsure whether an investment is right for you, speak to an FCA-regulated professional.