Using a Stock Screener

By using a stock screener we can save a lot of time when looking for stocks. A stock screener is a software tool used to generate a list of stocks with favourable attributes. With further analysis, the list is reduced to a small number of the strongest candidates. Stock screening is an efficient way to find potential investments. Let’s look at using a stock screener…

How does stock screening work?

Stock screeners are computer programs that allow you to search stock market databases.

To use a stock screener, you enter the search parameters that define what you’re looking for. The program then returns a list of stocks that matches those parameters.

Most stock screeners search through financial information. Some screeners also allow you to perform a search based on the attributes of stock charts.

Free stock screeners and fee-based screeners are available on the Web. For most people, the free stock screeners should be adequate for their purposes.

There is a list of free stock screeners at the bottom of this page.

Your strategy determines what you screen for.

Here are the main strategies used by stock market investors:

  • Long-term buy and hold
    Buy shares in strong, typically market leading companies and hold them for a long time (usually 5 or more years)
  • Income
    Buy shares for their dividends
  • Growth
    Buy shares in companies that are growing fast
  • Momentum
    Buy shares in companies only while their stock price is moving upwards
  • Value
    Buy shares in companies that are selling at a price significantly less than their true value

The art of stock screening

Stock screening isn’t an exact science. You could create a dozen different screens and they could all return a list of great companies. You might even notice that the strongest companies tend to show up on a number of different screens.

We’re looking for a good company at a cheap price. There are many ways to define a good company with a stock screener.

Our stock screen will look for companies that:

  • generate a high return on capital
  • are selling at a cheap price
  • are in good financial condition
  • have experienced recent sales growth
  • have positive cash flow
  • pay a dividend, and
  • have a reasonable market capitalization


Return on Capital

Return on capital (ROC) tells you how effectively management has been able to profitably reinvest funds back into the business. It is a key indicator of value. A company that can reinvest profits at a high rate of return can generate above average returns for investors.

There are many ways to calculate ROC. The simplest approach is to divide operating profit (EBIT) by shareholder’s equity and debt.

ROC = EBIT / (Shareholder’s Equity + Debt)

Stock screener parameters for ROC:

  • ROC greater than 10%

Note: Return on capital is also referred to as Return on Invested Capital (ROIC) and Return on Capital Employed (ROCE).

If the screener you are using does not include ROC, you can substitute Return on Equity (ROE) for ROC. Look for a ROE greater than 15%.

A Cheap Price

The price you pay for an investment is critical.

The return you get from your stock investment is the difference between the price you paid for the stock when you bought it. And the price you’ll receive when you sell it. The greater the difference between the purchase price and the selling price the greater your return.

We’ll use the Price-to-Earnings (PER) ratio to find a cheap stock. This ratio compares the stock’s current price to it’s earnings per share (EPS) figure.

This ratio tells you the amount of money investors are ready to pay for each cent or dollar of a company’s profits.

As a general rule, the lower the PER the better.

The PER isn’t the best valuation metric to use because it uses earnings, an accountants measure of profit based on assumptions and accounting policies.

We’ll only use the PER for stock screening. When we perform our in-depth analysis we’ll use better methods to put a value on the stock.

Stock screener parameters for price:

  • Price-to-Earnings less than 15 and greater than 5

Note: We exclude stocks with PERs below 5 because stocks with price-to-earnings valuations below 5 usually indicate that the company experienced some sort of earnings abnormality the year before.

The Price-to-Earnings ratio is also referred to as a P/E.

Financial Condition

Most stock analysis focuses on profits and debt. And with good reason. Profits drive share prices. And excessive debt can eat into profits and thus reduce share prices.

For now, we’ll only consider debt.

The Debt-to-Equity ratio and the Interest Coverage ratio are two basic measures of a company’s financial condition. They’re not the only considerations, but for the purposes of stock screening, they will suffice.

There are quite a few versions of the Debt-to-Equity ratio. But we are mainly concerned with long-term debt to shareholder’s equity for stock screening.

The Debt-to-Equity ratio compares a company’s debt funding to shareholder funding. In theory, the higher the debt, the more risk the company faces.

The risk can become real if interest rates rise and the company is then forced to pay higher interest payments on their loans.

The Interest Coverage ratio can be useful here. It measures how easily a company can repay the interest on its loans. It compares operating profit to interest expenses. A value greater than or equal to three is considered sufficient.

If a company has more debt than it can afford, future profitability can suffer as a result. The interest payments on loans can be a huge expense for a company. And remember…

Profits = Revenues – Expenses

The higher the expenses, the less the profit.

Debt isn’t necessarily a bad thing. It can be used to grow a company, finance new projects, or otherwise enhance the business. Debt only becomes a problem if it can’t be managed properly. For more information go to Financial Health.

Stock screener parameters for financial condition:

  • Debt-to-Equity less than 70%
  • Interest Coverage greater than or equal to 3

NOTE: Not all stock screeners include the Interest Coverage ratio. If that’s the case just use the Debt-to-Equity ratio.

Sales Growth

What’s the best way to measure growth?

Earnings itself? No. If only it was that simple.

Sales is the best measure of growth. It’s better than earnings. Earnings figures can be artificially enhanced in a number of different ways because accounting policies and assumptions determine the final figure. It’s too hard to get a clear picture of what’s happening within the company if you only consider earnings.

Sales on the other hand, is one of the cleanest numbers in accounting. I don’t want to get off topic here but I’ll just say that accounting is an accrual-based reporting system. And it doesn’t give us a true measure of what’s happening in the business. As astute investors, we need to look at accounting differently.

With the accrual system there’s a difference between the timing of the actual cash flowing through the business, and what’s reported. As investors, we don’t just accept what we see in a company’s financial report. We’re only interested in reality.

We want to see recent sales growth.

Stock screener parameters for recent sales growth:

  • Revenue / Share 1 year growth greater than 10%

Note: Your stock screener may refer to “sales” as “revenue”.

Positive Cash Flow

Cash flow is the life blood of a business.

It’s important when analysing a company to measure both accounting profits and cash flow profits. They both tell a different story.

Net profit isn’t necessarily a true measure of what a company earns. It’s an accrual accounting measure. To get a full picture of a company’s financial situation we need to consider the cash flow.

At the screening stage we’re only interested in finding companies with positive operating cash flow. We’ll have a more in-depth look at cash flow at a later stage if our candidate passes our initial quality control tests (i.e. Key Performance Indicators and Stock Chart Analysis).

Stock screener parameters for positive cash flow:

  • Price / Cash flow greater than 0

Note: Not all screeners include the Price/Cash Flow ratio. If this is the case don’t be concerned. It just means we’ll have something extra to check in our in-depth analysis later on.

Insist On Dividend Paying Stocks

As an investor, your returns come from share price gains (that come after you sell the stock) and the dividends you get paid while holding the stock.

Dividend paying stocks have a lot going for them:

  • You get paid while waiting for the stock price to rise
  • Dividends act as price stabilisers. As the stock price goes down, the dividend yield goes up. The higher dividend yield attracts income investors who purchase the stock for the high dividend. This brings the stock price back up.
  • A company’s board of directors sets the value of the dividends that are paid to investors. The relative value of the dividend payments can be used to gauge the future long-term growth expectations of the company.

If a company can generate enough money to maintain the business. And still have money left over to pay the shareholders a dividend. This is obviously a sign of financial strength.

To determine whether a company pays a dividend we use Dividend Yield.

Dividend Yield is the ratio of dividends per share (DPS) divided by the share price.

As a general rule, the higher the dividend yield, the better.

Stock screener parameters for dividends:

  • Dividend Yield greater than 4%

Market Capitalization

Market Capitalization is the number of stocks that a company has issued on the market times the current stock price. It represents the market value of a company.

We’re only going to consider companies that have a market capitalization greater than $250 million.

By insisting on stocks having a market capitalization above $250 million, we will hopefully ensure that our stock will trade at decent volumes on the market. Smaller companies tend to be traded less. Companies that trade at decent volumes make it easier to buy and sell stocks when we need to.

Stock screener parameters for market capitalization:

  • Market Capitalization greater than $250 million

Free stock screeners

United States

Provider Comments URL
Google Has a useful range of search parameters. User friendly.
Financial Visualizations Has an extensive range of search parameters. Also allows you to select stock chart parameters. Nice simple user interface.
Yahoo Finance A Java-based stock screener with a nice set of features. Allows you to select stock chart parameters as well as financial parameters.
Morningstar Provides some basic search parameters and specific Morningstar parameters. It has functionality that allows you to set a scoring criteria for your search results.


Provider Comments URL
Zacks A friendly user interface. A good number of search parameters. To screen for Canadian stocks (i.e. Toronto Stock Exchange). Select the “Company Descriptors” category. In the exchange drop-down box, select TSX.
Globe and Mail Basic stock screener.

United Kingdom

Provider Comments URL
Telegraph Provides useful search parameters. Simple to use.
MSN Money UK Very basic.

Summary Points

  • Stock screening allows us to find stocks with favourable attributes
  • Stock screening isn’t an exact science. Play around with it until you get the “mix” right
  • Don’t get too caught up in the numbers – they’re only a guide at this stage
  • After screening, stocks are compared to key performance indicators to see if they meet our more stringent quality requirements

Continue on to Lesson 3: Key Performance Indicators