How to use ratio screeners to shortlist stocks to buy?

Screeners are the most effective approach to narrow down a universe of over 3500 stocks. Screeners are what they sound like. These screeners enable you to narrow down your stock selection based on financial parameters. Screeners are valuable not only because they may be used alone, but also because they can be combined. So, what is the finest stock screener in India and how do you utilize it? Let us also look at some of the best stock screeners in India for day trading.

Profitability screeners

You can use this screener to screen and short list stocks depending on their profitability. For this screening, you can use a range of profitability metrics. You can, for example, screen based on operating profits or even net profits. You can use screeners such as Return on Equity and Return on Capital Employed to examine the stock in terms of return on capital. In reality, you can utilize the following combinations of profitability screeners:

Screen for =>=> NPM > 10% .and. OPM > 20%

Screen for =>=> ROCE > ROE .and. OPM > 25%

Efficiency screeners

Aside from profitability screeners, another key set of screeners concerns efficiency, or asset turnover as it is more commonly called. Efficiency screeners assess how efficiently assets are passed over in relation to the volume of sales. For example, if sales are three times the size of the assets, the asset turnover ratio is three (indicating a reasonable level of asset efficiency). Screeners can also be created based on fixed asset efficiency, core capital efficiency, working capital efficiency, and so on. These screeners can be tailored to the specific needs of the investor.

Solvency screeners

The incorporation of debt into the capital structure is a two-edged sword. On the one hand, it lowers the cost of money, but it also increases your financial risk. This is due to the fact that, unlike equity, debt must be serviced in terms of interest and principal repayments. As a result, solvency screeners play an important role in determining whether or not to invest in a stock. Solvency screeners for debt equity ratios, total leverage ratios, interest coverage ratios, debt service coverage ratios, and so on can be built. Solvency cut-off factors can be predefined and combined with the results of profitability screeners to produce the optimum outcomes.

Working capital screeners

Most industrial organizations have significant difficulties in managing working cash. Managing short-term assets like as debtors, inventories, and cash balances, as well as short-term obligations such as creditors, WC loans, and so on, provides a significant difficulty. The concept of working capital screeners is two-fold. First, it assesses if the company in question has a comfortable working capital situation. That is, the corporation should have liquid assets adequate to cover its short-term liabilities. This can be quantified using screeners such as the current ratio, quick ratio, and net working capital. The second aim of this screener is to determine whether working capital is being spent productively. Extremely low working capital ratios can be harmful, whereas extreme high working capital levels scream inefficiency.

Valuation screeners

After the fundamental screeners have been completed, this is usually the final level ratio screener. After you've shortlisted stocks based on your profitability, turnover, solvency, and working capital screeners, the final step is to validate your findings using the valuation screeners. There are several techniques to valuing screeners. Screeners are available depending on the P/E ratio, past price performance, P/BV for specific industries, dividend yield, and so forth. These measures assist you in shortlisting companies that provide the investor with valuation comfort. You don't only need a stock with a price lower than its actual value. The stock must also provide a decent margin of safety.

 Also read :- What we need to know about dealing in Trade 2 Trade stocks

Combining the various screeners..

Combining the multiple screeners adds significant value to the investor. You can accomplish this by configuring numerous conditions at the same time. Typically, these ratios are not screened as discrete variables. They are always screened as combinations. Consider the following examples: 

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

The examples above show how you can combine different ratio screeners to shortlist companies. The ratio screener can make your task lot easier if you have a completely populated business data base. This could be your initial move before focusing on stocks.