In my 2004 book, the BetterInvesting Guide to Computerized Investing and the Internet, I outlined a sample small-company growth screen, and the criteria are still valid today.
Sales greater than $500 million. This limits your search to companies that have revenues in the last 12 months less than $500 million, the definition of a “small” company proposed by BetterInvesting.
EPS and revenue growth in past three years greater than 15 percent. Smaller companies can’t be expected to have a full 10 years of history, so looking for companies with high growth in the past three years can find those with acceptable growth.
EPS R2 in past three years greater than 0.75. R2 (“R-squared”) is a measure of the consistency of a series of points, so this figure looks for companies with a certain minimal level of consistency of growth.
Debt/equity ratio less than 50%. Companies that are laden with debt may be less likely to perform well during economic hard times, so limiting the maximum amount of debt lessens the potential of this problem. To tighten up this area, set the limit at 33% or even to zero.
Pre-tax profit margins are stable or increasing. Stock Prospector and MyStockProspector.com use a unique numerical rating system that evaluates a company’s pre-tax margin trends (thus allowing you to limit your results to companies that look good in Section 2 of the Stock Selection Guide). In the program, set the PTI rating to be greater than 2.
Next: Adding Additional Criteria.
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