December 5, 2007

Business Screens

Finding potential businesses to investment in is hard work and good ideas do not come often. In this post I want to present some screening criteria I use periodically to screen for good businesses. I use msn screening tool, the deluxe screener is a good tool to use to screen stocks and retrieve information. I like the msn screener better than Yahoo and CNBC because it has more fundamental data elements than Yahoo and CNBC. In addition, it allows you to export data to excel which CNBC does not allow for it. You can find the tool here.

I have developed these screens based on my readings and common sense of what a good business should be. I have not back tested these screens as I do not need to. I do not need to validate their performance as it is irrelevant and not trust worthy. The screens provide ideas rather than an investment system. Under no circumstance you should take screening results, from these screens or any other, as investment worthy without doing your due diligence.

The screens I use are pretty strict and some times they do not yield any ideas. You can relax some of the screens a bit so you can see what comes up. You can also restrict these screen by market size if you have a preference for large cap, but I must say that large cap never make these screens from my experience, only rarely.




Current Dividend yield> Treasury Bill Yield

Not an essential screen but preferred.


Income per employee >= 1.1* Industry Average Income per employee

Indicate that a company has great management, which can be a subjective exercise. But income per employee, which is a company’s net income divided by its employee count, is an objective gauge of management’s effectiveness.


ROE: 5-year Avg. >= 17%

(ROE) to gauge profitability, but will also use return on invested capital (ROIC) to rule out high-debt stocks.


Return on Invested Capital: 5-year Avg. >= 17%

High-debt company would have a higher ROE than one with low or no debt. Return on invested capital (ROIC) takes debt out of the equation by adding it back to shareholder equity before doing the calculation. If a company carries no long-term debt, its return on capital would be the same as its return on equity


Pretax Margin 5-year Avg. >= 1.2* Industry Avg. Pretax Margin: 5-year Avg.

Search for companies with above-average profit margins.


EPS growth over last 5 yrs>=1.2S&P500 avg growth over the lest 5 years

To search of upward trend in earnings over the recent history of the company.


Debt to Equity Ratio <= 0.8*Industry Average Debt to Equity Ratio, or Debt/ equity ratio< 30%

Highly leveraged companies tend to be restricted in investment opportunities and agility. Decision making can be obscured.


Price/cash flow ratio <= 0.8* Industry Average price/cash flow

Valuation of stock compared to industry. This gauges companies with superior cash flow compared to their Market Price.


Price/cash flow ratio >=0.1

To rule out negative-cash-flow stocks


Current Ratio> 1.5

Quick Ratio >1

Net Profit Margin>0

To rule our companies with cash crunch


1 comment:

Anonymous said...

Nice Work!

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