Game 3: Criteria Builder, learn how screening works

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Reading is a start, practice makes it stick. Run the numbers in our investor tools, test yourself in Stock Jeopardy, or follow the start here guides to see what to read next after game 3.

What a screen is, and what it is not

A screen is a filter. You write a few rules, and a list of companies is sorted into those that pass and those that fail. It is a fast way to shrink thousands of stocks to a short list worth reading about. It is not a verdict. A company that passes is not “good,” and one that fails is not “bad.” It only means the numbers met your rules on that day.

A worked example with three made up companies

Suppose you set three rules. The P/E ratio must be under 20. Debt must be no more than the company’s equity (a debt to equity ratio of 1 or less). Sales growth must be at least 10% last year.

Company A has a P/E of 15, debt to equity of 0.6 and sales growth of 12%. It passes all three. Company B has a P/E of 12, debt to equity of 2.4 and sales growth of 14%. It looks cheap and fast growing, but the debt rule removes it. Company C has a P/E of 35, debt to equity of 0.2 and growth of 25%. It fails on price alone.

Look at what happened. Each rule caught a different kind of concern. Cheap with heavy debt, strong balance sheet but pricey. No single number tells the whole story, which is why screens use several. You can calculate a P/E yourself with the P/E ratio calculator.

How the thresholds change the result

Move one rule and watch the list change. If you tighten sales growth from 10% to 15%, Company A drops out and nothing passes. If you loosen the P/E limit from 20 to 40, Company C passes all three rules, even though it is the most expensive of the group. The lesson is that thresholds are choices, and every choice has a cost.

Different industries also have different normal ranges. A bank, a software firm and a utility carry debt and trade at multiples in very different ways. A rule that is sensible for one can wrongly throw out the best companies in another. Our guide on how to value a stock explains why context matters.

Common mistakes when building criteria

• Adding too many rules. With ten tight filters, almost nothing passes, and you may be fitting the rules to what already happened.
• Using one year of data. A single great or awful year can hide the usual picture.
• Trusting the screen and skipping the reading. Always read about the business before forming a view.
• Forgetting that numbers can be wrong or out of date. Check the source.

How to practice with the game

Try building a strict set of rules, then a loose one, and write down how the pass and fail lists differ. Then ask yourself why each company failed. Was it price, debt, growth or something else? That question teaches more than the pass list does.

Next, pick a single rule and look up its meaning in the glossary. If you can explain it to a friend in two sentences, you understand it. If not, read a bit more and try again. Screening is a skill that gets better with repetition, and the game uses made up numbers, so there is no risk.

Remember that the game does not recommend any company, and this page is education only.

Screening is a starting point for reading, not the end

After a screen gives you a short list, the real work begins. Open the company’s own reports. Ask what it sells, who buys it, and what could go wrong. A strong number can come from a one time event, such as selling a building, and a weak number can come from a temporary problem. Only reading shows which is which.

It also helps to know what the filters leave out. A screen on P/E, debt and growth says nothing about management quality, competition or how the company treats customers. It does not capture a lawsuit or a new rule that changes an industry. Use screening to decide what to read, never to decide what to own.

A small exercise to try after each game

Pick the one rule you think mattered most in your last round and ask a hard question: would a company that fails this rule always be a poor business? Often the honest answer is no. A fast growing firm may carry debt on purpose, and a slow, steady firm may look pricey because investors value its stability. Thinking about exceptions makes you a better user of any screen. Keep notes on the exceptions you find, and you will build a sense of when numbers deserve trust.

Questions people ask about stock screening

What is a stock screen?

A screen is a set of rules used to filter a large list of companies down to a smaller one. For example, you might ask for companies with positive revenue growth and low debt. The screen does not say a company is good. It only shows which ones match your rules.

Why do my screen results change when I adjust one rule?

Each rule removes some companies, so tightening one setting can shrink the list quickly. Loosening it brings names back. Testing small changes shows how sensitive your results are. If a tiny change swaps the whole list, the rules may be too narrow to rely on.

Can a screen tell me what to buy?

No. A screen is a starting point for research, not a recommendation. Companies that pass still need a closer look at their filings, business model and risks. The examples in this game use invented numbers, so they are only for learning how the process works.

Quick recap

Screening means setting clear rules and seeing which companies pass or fail. It narrows a big list but does not judge quality. Small changes to your criteria can change the results a lot. Use what you learn here to build a research habit, and check terms in the glossary.