Stock selection criteria for investment

With the advancement technology Analysis of financial statements become easy also its readily available in many of the stock market related portals such as screener

In this article we will show how to filter out good stocks for investment

while the criteria used is subjective below is the one we prefer

Sales Growth:

The Revenue a company derives from sales compared to a previous year

Growth should be consistent Year on Year

Companies with sudden spike in sales in one year should be ignored since it’s unlikely to be sustainable

Sales Growth >15% CAGR for last 5 years

Profit Growth:

To be successful and remain in business, both profitability and growth are important and necessary for a company to survive and remain attractive to investors

The Sales growth should be converted to profit growth

There is no use only sales grows but no impact on profit

Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success

Profit Growth >15%  CAGR for last 5 years

Profit

 Profit Margin:

Profit margins are perhaps the simplest and most widely used financial ratios in corporate finance

For investors, a company’s profitability has important implications for its future growth and investment potential

Look for companies with sustained operating & net profit margins over the years

Choose companies with Net profit Margin(NPM) >10

net-profit-margin-formula

Tax Payout

Tax rate should be near general corporate tax rate

Specific tax incentives are applicable to the company such as textile

A flat rate of 25% corporate tax is levied on the income earned by a domestic corporate

A surcharge of 5% is levied in case the turnover of a company is more than Rs.1 Crore for a specific financial year

3% educational Cess is levied

Hence Tax Paid out ratio should be >30%

Interest coverage:

 The interest coverage ratio is a debt and profitability ratio used to determine how easily a company can pay interest on outstanding debt

Interest coverage >4

Debt to Equity ratio:

Filter out for companies with lower D/E ratio

Debt to Equity ratio < 1.5

Price to Earning ratio:

It is the Ratio for valuing a company that measures its current share price relative to its per-share earnings

We will use Double the bank interest rate or average equity returns as benchmark

P/E<14

 

Price to Sales ratio (P/S ratio):

The P/S ratio measures the price of a company’s stock against its annual sales

P/S should be less than 2

You can watch below video to know how automate the stock selection

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