What is Stock Screening? Why is it important?

Stock screening is a technique to filter stocks based on criteria that suit us. There are good companies and many companies that have not performed well. To do a detailed check for all the companies it takes a lot of time. So we need to do stock screening to save time.

How to do stock screening?

To do stock screening, we need to use an application. Usually, the stock software from your securities company has a feature to screen stocks. You can use a predefined screener to do the stock screening. This predefined screener is a combination of stock screenings used by world-renowned investors. Made based on thoughts they have shared in books or events they have participated in. I personally prefer to create my own screener based on my preferred criteria.

But if you want to make manual stock screening parameters, then you must understand the financial statements in detail. After you determine what criteria you want to use, a list of companies that fit all of your criteria will appear.

There are several criteria that need to be considered in choosing a screening application:

• Low and negotiable transaction fees according to the size of our investment capital/transaction value.
• Can trade in the negotiated market.
• Has many features.
• The application is light to run.

PER and PBV for Cheap Stock Screening

The most frequently used parameters for stock screening are PER and PBV by a value investor.

What are PER and PBV?

Price to Earning Ratio (PER) is the comparison between the stock price and the company’s net income. So if the company has a PER of 10X it means that the current share price is worth 10X of the company’s net income.

Price to Book Value (PBV) is the comparison between the stock price and the company’s equity. Equity itself is the total net worth of capital holders (the result of assets minus liabilities). So if a company has a PBV of 2X, it means that the company’s current stock price has a price of 2X the company’s net income.

PER and PBV Case Studies

I will give a little illustration about PER and PBV for easier understanding. Suppose you and I work together to create a coffee shop. We agreed to issue 100 shares, of which I own 50 shares (50% ownership) and you own 50 shares (50% ownership) of the coffee shop.

One year running our coffee shop has a net income of $100,000.

Then Earning per Share (EPS) or net income per share from the coffee shop is worth $1,000 per share.

EPS formula = Net income / Number of shares outstanding

Because the development of the coffee shop is so good, it invites new investors to invest their money in the coffee shop. He bought 20 shares, of which 10 shares from me and 10 shares from you with an investment of $ 200,000 for the 20 shares.

So after the investor buys at a price of $ 10,000 per share, the Price Earning Ratio (PER) of our coffee shop becomes 10X.

PER formula = Share price per share / EPS

PER is equal to 10X which means, the purchase price of our shares can be paid with the company’s net profit for 10 years or we will roughly recoup after 10 years from the company’s net profit.

After all, we need to do a screening to find potential companies that we want to check further before we invest in the stock market. This activity can help you to filter what stocks are priced cheaply by the current market. But never buy shares just because the PER and PBV of the company are “cheap”. We need to do a more detailed analysis of financial performance and many other factors. Basically, the stock market is a volatile market, perhaps compared to the situation of the global gambling industry. If you ever want to try playing online gambling, you can find more information here on www.betting-sites.ca.