What are Stock Screeners and how should you use it?

What are Stock Screeners and how should you use it What are Stock Screeners and how should you use it?

How do you shortlist a handful of stocks from a universe of 4200 listed companies on the Bombay Stock Exchange. Even if you take a broad-based index like the BSE-500, that is still a lot of stocks to really get down to analyzing. How do you navigate the path from here? One way is to use screeners. The requirement is that you need to be clear about what are the types of companies you want to buy into. Do you want to buy into companies that are higher profitable? Are you looking at companies that are high on resource utilization efficiency? Are you looking at companies with low levels of financial risk? Do you want to invest in companies that are frugal in capital deployment? Are you looking for companies with efficient working capital management?

More often than not, you want a combination of two or three such parameters. Is there a quick and smart way to achieve these goals? The answer lies in screeners. Screeners actually permit you to short list a portfolio of stocks based on your unique financial criteria. Screeners can be used in isolation and also they can be used in combination. Let us look at some interesting stock screeners in the Indian context.

How to screen stocks on profitability?

These screeners allow you to short list stocks based on profitability. How it works. For example, screen stocks based on operating profits or net profits or even gross profits; if that is your purpose. If you want to cross across financial statements, you can look at stocks in terms of ROE and ROCE. A typical screener can be exemplified as under.

Screen for =>=> NPM > 10% .and. OPM > 15%

Screen for =>=> ROCE > ROE>15% .and. OPM > 20%

Screening stocks on efficiency and solvency

What do we understand by efficiency ratios? Efficiency or asset turnover as it is better known, measures how efficiently assets are turned over to generate sales. You can have screeners based on asset turnover ratio or even the inventory ratio. You can set threshold for these and short list stocks.

Solvency reduces with debt. Remember, debt reduces cost of capital but adds to your solvency risk. Debt has to be serviced via interest and principal repayments. Hence solvency screeners are very critical as a sounding board on whether to invest in the stock or not. Solvency screeners could refer to debt equity ratios or interest coverage ratios.

What exactly are working capital screeners?

For any manufacturing company, the most important endeavour is to finance current liabilities with current assets. That is a healthy scenario because otherwise you are funding your short liabilities with long term assets. That is a balance sheet risk. The whole idea of working capital screeners is two-fold it measures whether working capital situation is comfortable.

Some popular screeners for working capital include screeners for current ratio, quick ratio and net working capital ratio. You can also set working capital screener conditions in terms of debtor days and creditor days.

How to screen on valuation parameters

This is normally the last step in valuation after the fundamentals are found convincing. The basic rule is that if the fundamental story of a company is bad then it does not matter whether the valuation is attractive or steep. Once you short list stocks based on profitability, efficiency, solvency and working capital; the last step is to ratify all your findings combined with the valuation screeners.

Typical valuation screeners can be based on P/E ratio, past price performance, P/BV for sectors like BFSI, dividend yield etc. The idea here is to look for companies that have a margin of safety built into the price.

Finally, how do you put the screener story together?

The best and most actionable part is putting all the various screeners together to arrive at cogent conclusions. You can do that by setting multiple conditions at the same time. Here are some such examples where you can look at various aspects in a single combo.

Screen for =>=> NPM > 20% .or. ROE > 15% .and. P/E Ratio < 15X

Screen for =>=> Asset Turnover > 2 .or. Fixed asset turnover > 3 .and. Interest coverage > 1.5

Screen for =>=> Current Ratio >2 .and. Interest coverage > 1.25 .and. PBV < 2

These are just examples that combine multiple screeners to short list companies. In a nutshell, the ratio screener can make your job a lot easier. Want to try screeners try here 

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