Find a stock screening tool first. It is possible to sort the results using the screener according to practically any attribute you might think. You can specify characteristics you'd want to see in your results, such as an increase in annual sales of at least 10%.
When it comes to screening for potential investments, value and growth are the most important metrics. As technology improves, more criteria and customizability will be made available to users.
Set a goal for the future growth rate of earnings
While there are many other methods to identify good companies, the most common is the rate at which they are expanding. Investors prefer to place a higher value on fast-growing companies, so they're an excellent place to start your hunt for solid businesses.
Set up a filter for your company's expected earnings growth rate on the screener. For starters, a reasonable starting point might be 10% every year for five years; then, experiment with increasing the percentage to 15% or 20% to see what opportunities arise. Earnings growth of more than 20% is considered to be exceptional.
If the screener does not include an earnings growth screen, then a sales growth screen can be used in its place instead. Again, look for organizations that are increasing revenue (also known as sales) at a rate that you find appealing. For those who do not have access to future profit estimates, they can look back and see how earnings or sales have grown over the previous five years.
Find undervalued stocks by using the P/E ratio.
Make sure you understand that "inexpensive" here relates to undervalued equities, not just low-priced stocks. Despite the abundance of firms with low share prices, you may not always be getting what your money's worth in these investments.
When determining the worth of a stock, investors frequently divide the current value of one of the company's shares by the company's yearly earnings per share. The price-to-earnings ratio, abbreviated as P/E, is the result of this calculation. The lower the price-to-earnings ratio, the less expensive the company is. For example, investors may be prepared to purchase Facebook stock at a price-to-earnings ratio of 20 this year, whereas they paid a price-to-earnings ratio of 30 last year. Paying a lower price for your profits is a better deal if all other factors are equal.
Make sure to include the company's current P/E ratio in your stock screener to compare it with other parameters.
Use market capitalization to weed out high-risk businesses.
Your search should yield a large number of firms that are both inexpensive and expected to grow their earnings in the near future, as judged by financial analysts.
If you wind up with more firms than you need, you can specify a minimum size for the company, as determined by its market cap, to prevent some of the smaller, riskier stocks that may otherwise be included. As a general rule, the lower the company's market value, the riskier it is.