Stock screener: selection criteria and a complete method
Screening stocks effectively means choosing the right criteria, combining them intelligently and avoiding the classic pitfalls. This guide lays out the 4-pillar method used by Screener Small Caps, which you can apply to any universe of stocks.
The 4-pillar method
The 4 pillars of Screener Small Caps map to the 4 fundamental dimensions of analysing a stock: is it cheap? is it growing? is it financially sound? is it moving in the right direction? A good screener covers each of these dimensions, even with a single criterion per pillar.
| Pillar | Question it answers | Typical criteria |
|---|---|---|
| Valuation | Am I paying a reasonable price? | EV/EBITDA, P/E, Price-to-Book, FCF yield |
| Growth | Is the company growing? | Revenue CAGR 3–5y, EBITDA growth, margin expansion |
| Strength | Can it survive a downturn? | ND/EBITDA, current ratio, positive FCF, accruals ratio |
| Momentum | Is the market (re)discovering it? | 6–12 month perf vs index, distance from 52-week high, beta |
Pillar 1 — Valuation
Valuation measures what you pay relative to what you get. The two ratios most used for small caps are EV/EBITDA and the P/E.
| Criterion | Value threshold | Reasonable threshold | Warning signal |
|---|---|---|---|
| EV/EBITDA | < 6× | 6× – 12× | > 20× (unless strong growth) |
| P/E | < 12× | 12× – 20× | > 30× (unless biotech/tech) |
| Price-to-Book | < 1× | 1× – 2× | > 4× (unless ROE > 20%) |
| FCF yield | > 8% | 5% – 8% | < 2% (or negative FCF) |
EV/EBITDA rather than P/E for small caps: the P/E is sensitive to capital structure and one-off items, both common in growing small caps. EV/EBITDA is more robust for comparing companies with different capital structures.
Pillar 2 — Growth
5-year revenue growth (revenue_cagr_5y) is one of the most predictive features of the XGBoost model among those tested. Sustained organic growth reflects a structural competitive advantage and consistent management execution.
| Growth criterion | Target threshold (small caps) | Reading |
|---|---|---|
| Revenue CAGR 5y | > 10% | Feature #1 of the ML model |
| Revenue CAGR 3y | > 8% | Confirms the recent trend |
| EBITDA growth vs revenue | EBITDA > revenue (operating leverage) | Sign of economies of scale |
| EBITDA margin trend | Positive over 3 years | Structural improvement |
Pillar 3 — Financial strength
Financial strength determines a company's ability to weather shocks without dilution or restructuring. It is the most important criterion for limiting the risk of permanent capital loss.
| Criterion | Healthy threshold | Warning zone |
|---|---|---|
| Net debt / EBITDA | < 2× | > 3× (covenant risk) |
| Current ratio | > 1.5× | < 1× (short-term liquidity risk) |
| Positive FCF | Yes, 2 consecutive years | Chronically negative FCF |
| Accruals ratio | Close to 0 | > 0.10 (accounting vs economic earnings) |
Pillar 4 — Momentum
The momentum effect — the tendency of stocks that have recently outperformed to keep outperforming — is one of the best-documented phenomena in behavioural finance. On European small caps, the 6-to-12-month horizon is the most relevant.
| Momentum criterion | Positive signal | Negative signal |
|---|---|---|
| 12-month perf vs benchmark | > + 5 pts | < − 10 pts (caution) |
| Distance from 52-week high | Less than 20% below the high | More than 40% below the high |
| 3-month volatility | Moderate (10–25%) | Very high (> 40%) or very low |
Quick scoring grid
Rate a stock quickly across the 4 pillars with this 0–3 scoring grid: