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 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
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
