When you’re using a stock screener, do you ever wonder if you’re missing out on some lesser-known metrics that could give you a better edge in your investment strategy? For many investors, stock screeners serve as a crucial tool in filtering stocks based on certain parameters like price-to-earnings (P/E) ratios, market capitalization, and dividend yield. However, beyond these popular metrics, several lesser-known indicators often go unnoticed, yet can be instrumental in fine-tuning investment decisions. Understanding these hidden metrics could reveal valuable insights and transform how you approach stock selection, whether you’re looking at the Suzlon share price or assessing other opportunities in the market.
Let’s take a look at five of these underrated yet valuable metrics, and how you can integrate them into your analysis to enhance your decision-making process.
- Altman Z-Score
The Altman Z-Score is a metric that measures a company’s likelihood of bankruptcy. Developed by economist Edward Altman, this score is particularly valuable for assessing the financial stability of a company, especially in volatile industries. It combines five key financial ratios to produce a single number, providing insight into a company’s solvency.
- How it Works: The Z-Score uses a weighted formula, incorporating factors such as working capital, retained earnings, EBIT (Earnings Before Interest and Taxes), market value of equity, and total liabilities.
- How to Use It: A score above 3 suggests that the company is financially healthy, whereas a score below 1.8 indicates a high probability of bankruptcy. When using a stock screener, look for companies with a high Altman Z-Score to avoid investing in those with financial instability.
Applying the Altman Z-Score can be a simple way to reduce risk by filtering out stocks with high insolvency risk. It’s particularly useful if you are interested in small-cap or distressed stocks that may otherwise look attractive but carry a hidden risk.
- Piotroski F-Score
The Piotroski F-Score is designed to assess the financial strength of a company, focusing on the company’s profitability, leverage, liquidity, and operating efficiency. It consists of nine indicators, with each factor scoring a point for positive results.
- How it Works: The F-Score evaluates aspects like return on assets (ROA), cash flow from operations, and long-term debt levels. For each positive indicator, a company receives one point, and the scores can range from 0 to 9.
- How to Use It: A higher Piotroski F-Score (7-9) generally indicates that a company is financially robust, while a lower score (0-3) may suggest potential financial trouble. Look for stocks with a Piotroski F-Score of 7 or above, as these are typically the companies with solid financial health.
Adding the Piotroski F-Score to your stock screener criteria can help you quickly identify stocks with strong fundamentals. It’s an especially useful tool for value investors who want to assess if a seemingly undervalued stock is truly a quality buy.
- Earnings Yield
Earnings yield, expressed as a percentage, is the inverse of the price-to-earnings (P/E) ratio. Unlike the P/E ratio, which focuses solely on earnings relative to stock price, earnings yield provides a clearer picture of the earnings return on an investment. A high earnings yield can indicate an undervalued stock with potential for growth.
- How it Works: Earnings yield is calculated by dividing a company’s earnings per share (EPS) by its current stock price, then multiplying by 100 to express it as a percentage.
- How to Use It: Look for stocks with a higher earnings yield, especially compared to the market average or to other stocks in the same industry. Stocks with higher earnings yields are often undervalued and can offer better returns, as they provide a higher earnings return relative to the price.
Using earnings yield in a stock screener helps identify value opportunities, especially for investors looking for stocks that may not appear attractive based on the P/E ratio alone. This metric can be particularly useful in industries like utilities or manufacturing, where steady earnings matter most.
- Debt-to-Equity Ratio
Debt-to-equity (D/E) ratio is a well-known metric, but its importance as a “hidden” factor lies in its ability to reveal hidden leverage risks. While many investors look at a company’s assets and profits, the D/E ratio tells you how much debt a company is using to finance its operations.
- How it Works: The D/E ratio is calculated by dividing a company’s total liabilities by its shareholder equity.
- How to Use It: A high D/E ratio can be a red flag, indicating that a company may have difficulty meeting its debt obligations if revenue decreases. Conversely, a low D/E ratio suggests that a company is less reliant on debt, which can be advantageous in downturns. Look for companies with D/E ratios below 1, particularly if you’re investing in cyclical industries where high debt could pose a risk.
Incorporating the D/E ratio into your stock screener criteria can help mitigate risk by focusing on companies with solid balance sheets, especially in volatile markets.
- Price-to-Sales (P/S) Ratio
The price-to-sales (P/S) ratio is a useful metric for comparing a company’s market value to its revenue. It is particularly helpful for evaluating companies that may not yet be profitable, such as early-stage tech companies, which often have high growth potential.
- How it Works: The P/S ratio is calculated by dividing the company’s market capitalization by its total revenue over the past 12 months.
- How to Use It: A lower P/S ratio generally indicates that a stock is undervalued relative to its revenue, while a higher ratio suggests a premium price. When using a stock screener, look for companies with low P/S ratios within the same industry, as these may present undervalued opportunities.
By incorporating the P/S ratio, investors can identify potential growth stocks, especially in sectors where earnings are less predictable but revenue growth is steady. This metric is particularly relevant for newer companies or high-growth industries.
How to Integrate These Metrics into Your Stock Screener Strategy
To make the most of these hidden metrics, use a stock screener to filter stocks based on each metric according to your investment goals. For example, if you’re interested in stable companies with low financial risk, set parameters for Altman Z-Scores above 3, low D/E ratios, and high Piotroski F-Scores. If you’re a growth-focused investor, prioritize earnings yield, price-to-sales ratios, and Piotroski F-Scores.
Using multiple criteria can help you refine your selection, filtering out stocks that may look promising but fail in one or more key areas. For example, if you’re analyzing Suzlon’s share price alongside other options, these hidden metrics could help you find stocks with similar growth potential or stability based on your investment priorities.
Conclusion
Understanding and using hidden metrics in stock screeners can provide a more nuanced perspective on potential investments. Metrics like the Altman Z-Score, Piotroski F-Score, earnings yield, debt-to-equity ratio, and price-to-sales ratio offer insights into financial stability, profitability, valuation, and risk. By incorporating these metrics into your stock screening strategy, you can make more informed investment choices that align with your specific goals.
