In the midst of various attempts to identify reasonable investment opportunities I have developed a set of criteria that I use to screen what companies I use as a "base line," as it were. It makes it easy to examine a company if one is able to focus on what the company actually does, and how it does it, rather than having to go through the process of evaluating the fundamental data for each company at the same time.
The idea behind the set of criteria was to come up with a set of reasonable fundamentals that could be used in a screener (along with some industry-specific, or other desirable but not necessarily fundamental, criteria) to limit my search to only those companies that have solid (as far as I am concerned) financial standing. These criteria would not be limited to use in a screener, but would also be applicable (and applied) to companies I just happen to be looking at.
For brevity's sake, in my articles or blogs I will refer back to this particular Instablog, rather than explaining how I pick select companies. The list will be called my "Potential Investment Criteria," or PIC for short.
- Operating Margin [or EBIT] > 15%;
- Return on Assets [ROA] > 1 (or "> 0" or "positive");
- Return on Equity [ROE] > 1 (or "> 0" or "positive");
- Return on Investment [ROI] > 1 (or "> 0" or "positive");
- Debt Equity Ratio [D/E] < 1;
- Quick Ratio [QR] > 1;
- Payout Ratio < 100;
- Performance [ttm] > 0 (or "positive");
- Performance [mrq] > 0 (or "positive").
Operating margin is arbitrarily set at 15 - adjust as you see fit or to change the number of selections.
Screeners vary in how they accept filters, so some criteria might need to be entered in alternate formats. ROA, ROE and ROI are like this, as are the performance data.
If quick ratio doesn't bring up enough alternatives, switch to current ratio > 1.
Performance data are really technical, rather than fundamental, and are optional.