6 Steps to Find Quality Stocks using a Stock Screener
Investing in the stock market can be a daunting task, especially for beginners. With numerous stocks to choose from, it’s crucial to identify fundamentally strong companies that have a high potential for growth. A stock screener can be a valuable tool in this process, helping you filter out stocks that don’t meet your criteria. In this post, we’ll walk you through the 6 steps to find quality stocks using a stock screener.
Step 1: Define Your Criteria
Before you start screening, it’s essential to define your criteria. What are the key factors you want to consider when evaluating a stock? Some common metrics include market capitalization, sales growth, earnings per share (EPS), debt-to-equity ratio, and return on equity (ROE). Make a list of these factors and prioritize them based on your investment goals and risk tolerance.
Step 2: Screen for Market Capitalization
The first metric to screen for is market capitalization. A company’s market capitalization is the total value of its outstanding shares. To start, you want to focus on companies with a market capitalization exceeding ₹1,000 crore. This is because larger companies tend to have more resources, a wider reach, and a stronger presence in their industry.
Step 3: Verify Consistent Sales and EPS Growth
Next, you want to screen for companies with consistent sales and EPS growth over the past 5 years. This is important because growth is a key indicator of a company’s potential for future success. Look for companies with a sales growth rate of at least 20% and an EPS growth rate of at least 20% over the past 5 years. This will help you identify companies that are consistently increasing their revenue and profitability.
Step 4: Check the Debt-to-Equity Ratio
The debt-to-equity ratio is a key metric that measures a company’s financial health. A low debt-to-equity ratio indicates that a company has a strong balance sheet and is less likely to default on its debt. Look for companies with a debt-to-equity ratio of 0.5 or less. This will help you avoid companies with high levels of debt and improve your chances of finding a fundamentally strong stock.
Step 5: Verify Cash-Backed Profits
Another important metric to consider is the CFO/PAT ratio. This ratio measures a company’s cash flow from operations (CFO) relative to its profit after tax (PAT). A CFO/PAT ratio above 1 indicates that a company is generating cash-backed profits, which is a sign of financial health. Look for companies with a CFO/PAT ratio above 1 to confirm that they are generating profits that are backed by cash.
Step 6: Check ROE and Efficiency
Finally, you want to screen for companies with a high return on equity (ROE). ROE measures a company’s profitability by comparing its net income to its shareholders’ equity. A high ROE indicates that a company is using its equity efficiently and generating strong returns for its shareholders. Look for companies with an ROE of 20% or higher to identify those that are using their capital efficiently.
Conclusion
Finding fundamentally strong stocks involves a combination of financial metrics and careful screening. By following the 6 steps outlined above, you can use a stock screener to identify companies that meet your criteria and have a high potential for growth. Remember to prioritize your criteria, screen for market capitalization, verify consistent sales and EPS growth, check the debt-to-equity ratio, verify cash-backed profits, and check ROE and efficiency. With these steps, you’ll be well on your way to finding quality stocks that can help you achieve your investment goals.
Source:
https://ticker.finology.in/discover/guide/how-to-pick-strong-stocks-guide-screener
