Multex Investor Bulletproof Stocks

This screen finds candidates unlikely to be bankruptcy candidates any time soon.

Except for firms filing bankruptcy to avoid big lawsuits, companies usually fail for only one reason: they run out of cash. Some are recent startups that never reached profitability and folded when they used up their initial public offering (IPO) stash and couldn’t raise more. Others are formerly successful firms that ran into tough times when their earnings slumped to a level where they could no longer make interest payments.

Both categories share similar symptoms. They’re either burning cash, that is more cash is flowing out than in, or their cash flow isn't sufficient to service their debt. Avoiding bankruptcy candidates boils down to developing a set of requirements that cash-starved companies can’t possibly meet. That’s the goal of this screen. I call the survivors “bulletproof stocks.”

Here are the bulletproof stock qualifications:

Positive operating cash flow

Positive net income

Sales at least $50 million

Current ratio of 1.5 or higher

Total D/E ratio less than 0.4

The operating cash flow, net income, and sales requirements all refer to each company’s TTM results.

The positive operating cash flow requirement, in theory, eliminates cash burners. But it’s not foolproof, and insisting on positive earnings helps to assure that the company is, in fact, profitable. Requiring sales of at least $50 million filters out companies that look good on paper but, in reality, have no substantial business.

Insisting on positive income and cash flow doesn’t assure that those inflows are sufficient to service the firm’s debt. The current ratio compares a firm’s current assets to its short-term debts. Requiring a current ratio of at least 1.5 assures that current assets exceed short-term debts by a 50 percent margin, screening out companies that are cash flow positive now but weighed down by previously built-up short-term debts. The total D/E ratio compares the total of short- and long-term debt to the firm’s shareholder’s equity or book value. Total D/E ratios of 0.5 or less usually define low debt companies. Requiring ratios below 0.4 provides an extra margin of safety.

Multex provides an excellent step-by-step NetScreen tutorial. The link to the tutorial is labeled “Learn to use NetScreen” on the NetScreen page. You can also print a list of available NetScreen’s available parameters from the tutorial.

I’ve included an English language description and NetScreen’s abbreviation in parenthesis for each screening term.

Price to Cash Flow Greater than Zero

{Pr2CashFlTTM} > 0

The bulletproof formula requires positive cash flow. By definition, the cash flow is positive when the price/cash flow ratio is positive.

Current Ratio Greater than 1.5

{CurRatioQ} > 1.5

The current ratio compares current assets, specifically cash, inventories, and accounts receivables, to short-term debt.

Total Debt to Equity Ratio less than 0.4

{Dbt2EqQ} < 0.4

NetScreen is the only screener I’ve found that provides the total D/E ratio search parameter required by the bulletproof formula. Total D/ E includes both long- and short-term debt which differentiates it from the long-term D/E parameter provided by most screening programs.

TTM Sales Greater than $50 Million

{SalesTTM} > 50

Requiring $50 million sales during the last 12 months filters out companies that aren’t real businesses.

Net Profit Margin Greater than Zero

{NPMgn%TTM} > 0

The bulletproof formula requires positive net income of any amount for the last four quarters. The net profit margin is the net income divided by sales. The profit margin can’t be a positive number unless the net income is also positive.

Results

The screen should turn up around 800 bulletproof stocks. You can print the list in groups of 100, or you can download it into a spreadsheet.