Clean auditor's opinion. All public companies must have their year-end financial statements audited by a certified public accountant. Check for a "going concern" letter in the annual report or 10-K. If the company doesn't receive a clean bill of health, then move on to the next investment candidate. In Cognizant's most recent 10-K, PricewaterhouseCoopers says the financials conform with generally accepted accounting principles. So far, so good.

Lawsuits. Some court cases can mortally wound a company. Today, practically every company is the defendant in one or more lawsuits; that's just the way things are in a litigious society. But you're looking for legal torpedoes that might inflict serious harm or even put the company out of business. In the footnotes, Cognizant's management says there are no material lawsuits pending. This, too, is a positive sign.

Repeated unusual losses. Many companies provide a summary of operations for the last five or 10 years in their annual report or 10-K. See if there is a skein of "one-time" charges. If so, that should make you suspect the firm's earnings quality. Cognizant's income statement shows one unusual loss (2001) in the last five years. Because the impairment charge was only 10% of earnings, that's a pretty clean record.

Earnings restatements. More troubling than an unusual loss is a restatement. This is when results previously blessed by the auditor are later deemed incorrect. In recent years, the problems for many companies that blew up were preceded or precipitated by an earnings restatement. Fortunately, Cognizant has not restated its financials in the last five years.

Ratio of intangibles assets. If a company has a high percentage of assets in the form of intangibles like goodwill, that's alarming. Why? Because if management later deems the intangible impaired (of no economic value), the asset will have to be written off, which reduces stockholders' equity. You don't want a diminution in corporate net worth; this may lead to adverse debt ratios and possible violation of loan covenants. Cognizant has $13.7 million of goodwill and other intangibles on $231 million of total assets, so the intangibles assets ratio is just 6%. There's nothing to worry about here.

Debt-to-equity ratio. To mitigate the risk of owning a company that goes bankrupt, steer clear of firms with debt-to-equity ratios over 75%. Because Cognizant is financed entirely with stockholders' equity, its debt-to-equity ratio is zero. That's another plus.

Revenue growth. Great growth companies make products or provide services that people want or need. Therefore, top-line revenue growth is sine qua non. After all, revenue growth is the only way to get bigger over time -- you can't shrink your way to greatness. In 2002, Cognizant's revenue totaled $229 million, up from $59 million in 1997. Thus, its four-year growth rate is a lusty 288%. Terrific.

Stock-based compensation ratio. The 2002 10-K shows stock-based compensation of $11.6 million. Net income, meanwhile, totaled $34.6 million. Therefore, Cognizant's stock-based compensation was 34% of accrual profits. This high ratio is a concern, and deserves further scrutiny.

Short ratio. As a rule, short-sellers are more analytically rigorous than the average investor. Shorts have to be, because it's riskier to bet on a firm's demise (or sharp decline in stock price) than to go long. Unless you really know what you're doing, avoid companies with high short interest. According to its profile page on the Yahoo! Finance Web site, as of September (the latest period available), 3.97 million shares of Cognizant were sold short and the float was 62.7 million shares. Therefore, the short ratio was 6%. This is low, which is encouraging.