Screening an Income Statement to Find Undervalued Stocks

stride-analysing-an-income-statement-with-a-technical-stock-screener-featured.jpgVideo Tutorial: Discover how to find undervalued stocks using a company's income statement in our second video tutorial using STRIDE's stock screening software.

Welcome to our second episode on screening stocks using income statement information. A quick enlightening: An income statement is a historical analysis of a business (generally for the past year). Last week we had a look at the balance sheet analysis in a similar video tutorial.

In this video tutorial, with STRIDE's stock screening software, we explore the deep analysis of an income statement. Using financial ratios like: Total Revenue Growth, Net Income Growth, and Normalised Net Income Margin, we want to see two key things: 1) Growth, and 2) Profitability. 

How to Analyse an Income Statement to Find Undervalued Stocks

Wistia video thumbnail - Income Statement Screen

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If you'd like to learn more about screening stocks using financial ratios and balance sheet information, sign up for a free demo of STRIDE's stock screening tools below.

The following points are taken from the above video tutorial's transcript.

Using Total Revenue 1 YR Growth %

What do we want to see growing? The truth is that we want to see everything growing… that should be your initial expectation. Especially, you want to see that businesses are growing their revenue in the past year at least to match the inflation rate (roughly 3.2% for the past year at the time of this video). But, while this view offers an insight into which businesses are performing against the market, it doesn’t offer a view of who has been growing consistently.

Total Revenue 5 YR CAGR %

When you choose these longer periods, it is tempting to select 7 or 10 year growth periods. However, you must keep in mind that choosing these means that you automatically exclude businesses who haven’t been listed for that long. That’s why looking at 5 years can often be your best indicator for consistent growth, if you want to avoid this. With this ratio, you can determine the annual growth percentage that you’d prefer to see (say, 5+% per year for the last 5 years). 

Net Income 1 YR Growth % and 5 YR CAGR %

Now, we’re jumping to the bottom of the income statement for the sake of brevity, but when you look at net income you also want to see growth and consistency. When you run these ratios against businesses in your screener, you’ll see businesses that have grown their revenue in the past year, and consistently for the past 5 years. But, you’ll also see now that these growths echo through down to their bottom line.

Normalised Net Income Margin

Let’s talk more about profit. To understand how much profit a business is making, we want to look at margins. You get margins at all sorts of different levels, but really what you want to see is that the normalised net income margin exceeds a certain limit (say, 10% - although, this all depends on the particular businesses that you’re looking at). This shows you how large or small a company’s net income margin really is.

Revenue Growth Streak and EPS Growth Streak

The last things to consider are streaks. Streaks help you to effectively identify if a company has consistent growth or not. In the previous growth ratios, a company’s growth percentage over a 5 year period may be skewed by exceptional growth in only 1 year. Of course, you don’t want to put your money into such a volatile company as that, necessarily. You want consistent growth, that promises future growth. That’s where streaks help you. Streaks identify that your prescribed growth rate doesn’t happen at only an average, but also consistently at each financial report.

Next week, we’ll do another video tutorial, but instead we’ll be looking at the cash flow criteria. Please do join us then, but in the mean time enjoy a free live STRIDE demo to test out our stock screening software for yourself.

Topics: STRIDE, Valuation


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