Today there are more than 3000 listed companies in the stock market. It would be a nearly impossible task for a retail investor to study each company to find out whether it is worthy of investment or not. To solve this problem Screener.in is a wonderful tool that has been provided to us for free. You can use it to create your customized queries and find the companies which fit that particular criteria. Then you can study only those companies, which reduces your research time drastically. You can use it to do a complete financial analysis of the company from understanding various financial metrics about the company to checking its sales, profit margins, and PE ratio graphically.
In this article, we will learn how to build a custom screener which will help us filter out financial sound companies. To understand the complete process read till the end.
Query for screener
Market Capitalization > 500 AND
PEG Ratio <1 AND
Debt to equity <0.5 AND
Pledged percentage <5 AND
Average return on equity 5Years >15 AND
Average return on equity 3Years >15 AND
Sales growth 5Years >20 AND
Profit growth 5Years >20 AND
Return on invested capital >15 AND
NPM last year >8 AND
Return on capital employed >20 AND
Average return on capital employed 3Years >20 AND\
Interest Coverage Ratio >15 AND
Average return on capital employed 3Years > Average return on capital employed 5Years AND
Average return on equity 3Years >Average return on equity 5Years
Each criterion Explained
- Market Capitalization > 500: Here we are interested in only those companies which have a market capitalization of 500 crores or above. This criterion ensures that the selected companies can provide sufficient liquidity. Companies with higher market capitalization often have more established operations and can offer greater stability and investment opportunities. Companies with smaller market cap sometimes operate in a circuit-to-circuit manner which makes it very difficult to exit from such stock once it starts falling. So to protect your well-earned money it is very important o know that you will be able to move in and out of the stock at your defined price levels.
- PEG Ratio < 1: PEG Ratio =PE RatioEarnings growth rate A price-to-earnings growth (PEG) ratio is a valuation metric that compares a company’s stock price to its earnings growth rate. It is calculated by dividing the stock PE ratio by the company’s earnings per share (EPS) growth rate. A PEG ratio of less than 1 indicates that the company is undervalued, as its stock price is lower than its earnings growth rate. Companies with a PEG ratio of less than 1 are often considered to be good investment opportunities, as they are expected to grow their earnings at a faster rate than their stock price.
- Debt to equity <0.5: The debt to equity ratio measures the total debt of the company to the shareholder’s equity. The purpose of this criteria is to filter companies with comparatively lesser debt. If a company has large debt then a large portion of its earnings will be used for interest payment for that debt which leaves the company with little cash. The more cash the company has, the easier it will be to manage its operations during downturns. The company can also use this extra cash for CAPEX which will further improve the operations (Sales) of the company.
- Pledged percentage <5: The pledged percentage refers to the proportion of a company’s shares that have been pledged as collateral for loans or other purposes. Generally pleading is seen as a last resort for raising funds for emergency situations. If a promoter is pledging the shares then it means that he is left with no other option to raise funds. Pledging shares is a sign of low credibility, poor cash flow, inability to meet necessary requirements, and high debt. It helps identify companies with more stable ownership structures and potentially reduces the likelihood of forced share sales.
- Average return on equity 5Years >15: Return on equity tells us about how much profit the company was able to generate on the shareholder’s equity. If the average ROE of a company is more than 15% for the last 5 years then it means the company generates healthy profits relative to the capital invested by shareholders. A high ROE indicates that the company efficiently utilizes its resources and is considered a positive attribute of a good company. Here you should check that ROE each year is not fluctuating too much.
|Year||ROE (Company-1)||ROE (Company-2)|
|1||17 %||17 %|
|2||2 %||14 %|
|3||32 %||18 %|
|4||5 %||15 %|
|5||28 %||16 %|
|Average ROE for 5 years||16.8 %||16.0 %|
In the above example even though the average ROE for 5 years for company-1 is more than the company-2, we should choose company-2 because its returns are too much fluctuating and are consistent year by year.
- Sales growth 5Years >20: this criteria filters those companies which have sustained robust sales growth over an extended period of time. Companies with strong sales growth are often seen as having a competitive advantage, expanding their market share, and capturing new opportunities. It suggests that the company’s products or services are in demand and that it has a strong business trajectory.
- Profit growth 5Years >20: Similar to the previous query, this condition filters for stocks with a profit growth rate over the past five years greater than 20%. If the profit growth rate of a company is similar to the sales growth rate of the company then it means that all the profit generated by those extra sales is directly going to its profit book and not being used to service any other expenses.
- Return on invested capital > 15: Return on Invested Capital (ROIC) tells us how profitable a company’s investments are. If the value is above 15%, it means the company is earning healthy returns on the money it has invested in its operations. This suggests that the company knows how to use its capital effectively and make attractive profits from its investments. Companies with a high ROIC are considered efficient and capable of achieving good financial performance.
- NPM last year >8: The net profit margin (NPM) is determined by dividing a company’s net income, which is the profit remaining after all expenses and taxes, by its total revenue or sales. Usually expressed as a percentage, an NPM greater than 8% indicates that the company is generating a healthy profit relative to its total revenue. Companies with a high NPM often enjoy a competitive advantage in their respective industries. This advantage may arise from factors such as strong brand recognition, cost efficiency, superior products or services, or effective pricing strategies. Moreover, sustainable profitability suggests that the company can thrive and maintain its market position even in challenging economic conditions.
- Interest coverage ratio >15: it is calculated by dividing the company’s earnings before interest and taxes (EBIT) by its interest expense during a given period. A higher interest coverage ratio means the company has more than enough earnings to timely pay its interest payments and it won’t default on its debt.
Words of caution
The numbers that have been selected for each query as passing criteria are not absolute. You are absolutely free to play around with them but be sure to not vary them so much that the query starts to lose its purpose altogether.
When looking at margins percentage and other ratios such as ROE, ROCE, ROIC, etc you should look at their trend as well, if the trend of these ratios is consistent and going up then it is very good news, you might have actually found a very good company.
But if these ratios are cyclical (are fluctuation very much in peak and trough) then the company might be cyclical. Beginners should stay away from companies which susceptible to cycles.
Screener.in can be a wonderful tool for retail investors to find great companies. You can find sector leaders, turnarounds, cyclical, etc. as per your style of investing. If you can frame your questions logically then you can build a query as per your requirement that will give you a preliminary list of companies for you to begin with. You will have to manually go through these companies and do further analysis such as reading concalls, credit rating reports and annual reports to find any red flags. if you do this exercise regularly then there is no doubt that you will find good companies to invest in and multiply your wealth over time.
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