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How To Screen For Stocks

Singapore’s stock market is not the biggest. But even then, it has more than 700 listed entities. Unless you have the capabilities of someone like Warren Buffett, analysing each company individually would be incredibly difficult.

This is where a screen comes into play. A screen can help us prune the universe of stocks we have to study into a more manageable number. But this raises the question: What criteria should go into our screen?

Here are three to consider, including an explanation of just why they are important:

1. Three-year earnings per share growth of over 12% annually

Over the long-term, a stock does well if its business is doing well. This criteria helps to capture companies that have displayed good growth in their earnings in recent years, with the idea that past-growth is a useful sign (but not guarantee) of future-growth.

2. A return on equity of 15% or more

A high return on equity is a proxy for the presence of a competitive advantage in a company. A competitive advantage in turn, helps the company to stave off competitive pressures and bring in above-average profits over the long-term.

3. A debt-to-equity ratio of less than 50%

The return on equity can be artificially juiced by employing high leverage. By having this criterion, we can remove companies that have high returns on equity mainly because they are taking on lots of debt.

It’s worth noting too that a high debt-to-equity ratio could also mean that a company’s taking on a large amount of financial risks.

Now that we have the criteria, the next stop is to find databases that allow us to input the criteria. Fortunately, there are free stock screeners that are available for use.

The following list is not comprehensive in terms of the free stock screeners that are out there, but it’s still a useful place to start:

1. Google Finance 

The database covers stocks from many countries (including Singapore) and investors can also find news and articles that the financial media have written about a company on the company’s Google Finance page.

2.  SGX Stock Facts

The free version is only for stocks in Singapore, but it allows you to filter stocks based on the industry it belongs to, which is interesting. A disadvantage SGX Stock Facts has is that only a maximum of five criteria can be applied at any one time. A paid-for version opens up a wider database that includes other Asian markets such as Malaysia, Taiwan, Thailand, and more.

A Foolish conclusion

Running a stock screen helps to prune the number of stocks we have to investigate into something more manageable. But, it is crucial to know that a stock screen is merely a first-stage filter. More research work must be done on the companies that pass a screen before any investing decision can be made.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.