When screening and picking stocks for investment, it’s crucial to apply a set of filters to identify fundamentally strong companies at reasonable valuations. Below are key metrics categorized into constraints, foundation filters, valuation filters, and other filters to consider.

Constraints

These are basic thresholds to ensure the company is stable and of sufficient size:

  • Debt to Equity Ratio < 0.5: High debt can burden small companies during economic downturns due to interest costs.
  • Market Cap > 3000 Cr: Focus on mid-to-large cap companies for better liquidity and stability.
  • Market Cap < 20000 Cr: Avoid very large cap companies that may be less dynamic.

Foundation Filters

These assess the company’s growth and profitability fundamentals:

  • Profit Growth 3Yr > 15%: Ensures consistent profit expansion over the past three years.
  • Sales Growth 3Yr > 10%: Indicates revenue growth momentum.
  • EPS Growth 3Yr > 0.5 * Price Growth 3Yr: Earnings per share growth should keep pace with stock price appreciation.
  • Return on Equity (ROE) > 15%: Measures how efficiently the company generates profits from shareholders’ equity.
  • Return on Capital Employed (ROCE) > 20%: Evaluates profitability relative to total capital employed.
  • FIIDII < 20%: Foreign Institutional Investor and Domestic Institutional Investor holdings should not be excessively high to avoid volatility.

Valuation Filters

These ensure the stock is not overpriced:

  • PEG < 2: Price to Earnings Growth ratio should be reasonable, indicating fair valuation relative to growth.
  • PE < 1.5 * Industry Median PE: Price to Earnings ratio should not exceed 1.5 times the industry average.
  • PE < 0.5 * Median PE 3Yr: Current PE should be less than half of the median PE over the past three years.

Other Filters

Additional checks for financial health and operational quality:

  • Positive Operating Cash Flow: Ensures the company generates cash from operations.
  • % Leveraged Positions of Total Positions: Monitor leveraged positions to assess risk.
  • Gross Margins Increasing or Stable: High and stable gross margins indicate pricing power.
  • Interest Coverage Ratio > 4: Ability to cover interest expenses comfortably.
  • Promoter Pledging < 5%: Low promoter pledging reduces risk of forced selling.
  • Capex Expansion or Completion: Look for companies investing in growth or completing projects.
  • Related Party Transactions: Should be minimal and transparent.