Expressive Wealth
Evidence-Based Exit Model
Layer 03 of 03 · EXMF · DDFS · EBE
The Exit Framework
EBE
Evidence-Based · Exit · Model
When DDFS identifies conviction, EBE protects it. Six core rules monitor the three DDFS pillars in real time — triggering structured exits before deterioration becomes permanent damage.
Core rules detect structural deterioration. Secondary rules confirm whether deterioration is spreading.
A stock can fail secondary criteria and still remain strong.
When core criteria fail — the business engine itself is changing.
Six Core Rules
Rule 01
Discipline
ROIC < WACC
Capital Return Test
Once returns fall below cost of capital, value creation stops. The highest-quality capital test in the framework.
2 consecutive periods below WACC = full thesis review
Rule 02
Durability
FCF / NI < 0.80
Earnings Quality Signal
Accounting earnings may still look fine while cash weakens. The purest early-warning signal in the model.
Below 0.80 for multiple periods = earnings durability weakening
Rule 03
Durability
OCF / NI < 1
Operations Funding Test
Confirms whether earnings are truly funded by operations. Catches quality erosion before it becomes visible.
Repeated OCF below NI = serious concern
Rule 04
Financial Strength
Net Debt / EBITDA > 3
Survivability Line
Leverage becomes dangerous above this level. Tightens further in hawkish rate regimes or credit stress periods.
Above 3 = fragility review · Above 4 = major sell trigger
Rule 05
Financial Strength
Coverage < 4x
Debt Restrictiveness Test
Refinancing risk rises quickly below this level. Evaluated in context of the prevailing rate regime.
Below 4x in rising-rate regime = major warning
Rule 06
Durability
Margin Now < TTM
Operating Margin Trend
Margins crack before earnings visibly miss. One of the earliest structural signals available in the data.
2 consecutive declines = operating pressure confirmed
Action Framework
1
core rule broken
Monitor closely
2
core rules broken
Put on review list
3
core rules broken
Trim candidate
4+
core rules broken
Exit case becomes strong
Secondary Rules — Confirmation Only
PEG Ratio
> 2.0
Price / FCF
> 35
Earnings Yield
< 4.25%
Current Ratio
< 1.0
Revenue Growth vs EPS Growth
diverging
Gross Margin vs Industry
lagging
“We sell on evidence, not emotion. Not a stop-loss. Not momentum. Not calendar year-end. We exit when the business engine itself is changing.”
Evidence over emotion · EBE Core Principle