How to Choose Stocks Using Financial Ratios Found on Yahoo! Finance

With thousands of stocks to choose from, most investors need a little help weeding out the mediocre ones to find higher-quality picks. A company’s financial ratios – information that lets you quickly and efficiently make an ’apples to apples’ comparison – can do just that. Better still, the process can be done in only a few minutes using free tools found on the Yahoo! Finance home page.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Access to the Internet
• An idea of the sector or sectors in which you’d like to invest

1. Go the Yahoo! Finance page, and move your mouse over to the Investing tab. A sub-menu will drop from the tab. Choose ‘Stocks’ and you’ll be taken to a new Yahoo page.

2. The new page will offer you several options. Look for the ‘Research Tools’ group and select the ‘Stock Screener’ link. Yet another new page will appear.

3. Choose ‘Launch HTML Screener’, or a basic screener. This will take you to the criteria selection tool.

4. First select a category, or sector/industry. (If you need to find stocks in more than one sector, you can repeat all of the following steps.) You can also apply index membership criteria if you’re specifically looking for a company of a certain size. However, this tends to not be a significant consideration for most investors.

5. Using any of the ‘share price’ options is optional, though a good rule of thumb may be to only buy stocks that are priced at $5 or greater. Stocks priced under $5 tend to be overly-volatile. The other share data choices aren’t particularly critical for most investors.

6. In the Sales and Profitability section, the sales revenue options are not necessarily helpful, but Profit Margins are important. In general, you’ll want the company to be generating positive earnings. So, at least select 0% margins as a minimum requirement. A minimum of 10% would be even better, though it may also weed out some otherwise good stocks.

7. In the Valuation Ratios portion of the screener, the lower the Price/Earnings ratio is, the better. This is a measure of how much investors are paying for a stock compared to how much the company is earning per share. A P/E between 10 and 25 may be a good place to start looking for moderately–priced stocks.

8. The Price/Book ratio should also be low. You may want to start with a maximum of 20, and adjust later if you need to.

9. The Price/Sales ratio should be low as well. The market’s ‘average’ P/S reading is between 0 and 5, though there are some situations where a higher price/sales ratio can be justified.

10. The PEG ratio (P/E compared to growth) can be ignored by most investors who are just looking for a basic, small list of stock ideas. However, if you so desire, you might want to start with a maximum PEG ratio of 10.0. Note, however, this data may or may not paint a true picture of a stock’s value.

11. The Analyst Estimates section can be skipped; analysts are frequently wrong, or late, in forming an opinion.

12. For the Results Display Setting, choose ‘All Available’, and hit the ‘Submit’ button. All the stocks that fit your criteria are listed on the next page. You’ll still need to do further digging into any particular company, but you’ll have a much shorter list of companies to work through.

Tips & Warnings

• Though low price-based ratios are desirable, a wildly low P/S or P/E reading may be a red flag of other problems. The market has a way of finding undervalued stocks pretty quickly, which means it’s not likely you’ll be the one to find the rock-bottom bargain.
• Cheap stocks are one thing, but rising stocks are another. Just because a stock offers an attractive fundamental 'snapshot' doesn't by itself mean it's a good investment. Other factors can also affect a stock's price.