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TL;DR: Use five key financial indicators (ROE > 15%, growing EPS, gross margin > 20%, debt ratio < 50%, positive free cash flow) as a first-pass filter to quickly narrow down thousands of stocks to a shortlist of financially healthy candidates.

Concepts

Why Use Quantitative Screening?

Taiwan's listed and OTC markets have over 1,700 stocks combined, and U.S. markets have more than 5,000. You cannot analyze them one by one, so you need a set of screening criteria to quickly narrow the field.

The concept is simple: define a few financial thresholds, let the computer filter for you, and what remains is worth a closer look. This does not mean you should blindly buy whatever passes the screen -- it means you are spending your research time where it counts.

The Five Key Indicators and What They Mean

1. ROE > 15% (Return on Equity)

ROE measures "how much the company earns with its shareholders' money." An ROE of 15% means the company earns $15 for every $100 of shareholder equity per year. ROE is one of Warren Buffett's most important stock-picking criteria -- he favors companies that maintain an ROE above 15% over the long term.

A high ROE indicates a competitive advantage, generating more profit from less capital. However, if the high ROE is driven by heavy debt (leveraged up), it is not as healthy as it looks.

2. Consistently Growing EPS

Earnings Per Share (EPS) is the most direct measure of a company's profitability. If EPS grows year after year, the company's earnings power is getting stronger. Look at at least three consecutive years of EPS growth -- a single good year might just be luck, but sustained growth demonstrates real capability.

3. Gross Margin > 20%

Gross Margin = (Revenue - Cost of Goods Sold) / Revenue. A high gross margin means the company's products or services have pricing power and are less vulnerable to price competition. 20% is a basic threshold -- the higher, the better. Branded consumer goods and software companies often have gross margins above 50%, while contract manufacturers may only achieve around 10%.

4. Debt Ratio < 50%

Debt Ratio = Total Liabilities / Total Assets. A low debt ratio signals a sound financial structure that is less likely to run into liquidity issues during downturns. 50% is a general safety threshold, but norms vary by industry -- financial institutions inherently carry higher debt ratios, so the same standard should not apply to banks.

5. Positive Free Cash Flow

Free Cash Flow = Operating Cash Flow - Capital Expenditures. This represents the cash the company truly has left after maintaining operations and investments. Consistently positive free cash flow means the company is generating real cash, not just paper profits. Some companies report strong EPS but negative free cash flow, which raises questions about earnings quality.

Going Further: Look at Trends, Not Just Thresholds

Passing all five thresholds is the minimum bar. An even better approach is to track how these indicators are trending: Is ROE rising or falling? Is gross margin being squeezed? Has the debt ratio spiked? When trends are moving in the right direction, it signals that the company's competitive position is improving.

Hands-On: Using CTSstock

CTSstock's Multi-Factor Screener (/vip/screener) lets you customize a wide range of filtering criteria.

Supported screening dimensions include:

Financial data: EPS, Book Value Per Share (BVPS), Revenue Per Share, Free Cash Flow Per Share
Profitability: Gross Margin, Operating Margin, Net Margin, ROE, ROA
Safety: Debt Ratio, Current Ratio, Interest Coverage Ratio
Growth & Valuation: Revenue Growth Rate, Earnings Growth Rate, P/E Ratio, Price-to-Book Ratio

Steps:

Go to the /vip/screener page
Set your filtering criteria based on your strategy
Click to filter -- the system will display a list of qualifying stocks
Click on any stock to go directly to its detailed analysis page

Start with the five basic criteria above for your first-pass filter, then layer in additional conditions based on your preferences (e.g., dividend yield > 4%, P/E < 15x) to further narrow the list.

FAQ

Q: Do these five indicators work for every industry?

They work for most industries, but there are exceptions. Financial institutions inherently have high debt ratios, so a 50% threshold would screen out every bank stock. Construction companies also have unusual cash flow patterns -- cash flow may spike in years when projects are delivered and turn negative in other years. Adjust thresholds as needed for specific industries.

Q: Can I just buy the stocks that pass the screen?

Not recommended. Quantitative screening is only the first step -- it helps you find stocks "worth researching." After screening, you still need to evaluate qualitative factors like industry outlook, competitive advantages, and management quality, as well as whether the current valuation is reasonable. Think of the screener as "the first layer of the funnel." Human judgment is still needed for the layers that follow.

Q: What if my criteria are too strict and only a few stocks pass?

That means your standards are high, which is not necessarily a bad thing. But if you want to expand the pool, you can moderately relax one or two criteria -- for example, lowering ROE from 15% to 12%, or raising the debt ratio threshold from 50% to 60%. The key is to keep the criteria you care about most and be flexible with the rest.