{"id":3989,"date":"2019-10-08T13:33:00","date_gmt":"2019-10-08T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=3989"},"modified":"2026-02-25T16:49:18","modified_gmt":"2026-02-25T16:49:18","slug":"screening-potential-equity-investments","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/","title":{"rendered":"Screening for Potential Equity Investments"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Applications of Financial Statement Analysis (2025 Level I CFA\u00ae Exam \u2013 FRA \u2013 Module 12)\",\n  \"description\": \"CFA Level I Financial Statement Analysis lesson on Applications of Financial Statement Analysis covering performance evaluation, forecasting net income and cash flow, credit analysis, equity screening, and analyst adjustments for financial statement comparability.\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/Wz_i_ysNwkc\/maxresdefault.jpg\",\n  \"uploadDate\": \"2022-04-30\",\n  \"duration\": \"PT42M10S\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=Wz_i_ysNwkc\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/Wz_i_ysNwkc\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": [\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Which statement about stock screens is least accurate?\",\n      \"text\": \"Which of the following statements is the least accurate?\\n\\nA. The criteria used in stock screens are often independent.\\n\\nB. Value screens usually feature criteria that set upper limits for the value of one or more valuation ratios.\\n\\nC. Back-testing may not provide a reliable indication of future stock performance because of survivorship bias, look-ahead bias, or data-snooping bias.\",\n      \"answerCount\": 1,\n      \"datePublished\": \"2026-02-17\",\n      \"upvoteCount\": 0,\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"The correct answer is A. The criteria used in stock screens are often not independent. Statements B and C are accurate.\",\n        \"datePublished\": \"2026-02-17\",\n        \"upvoteCount\": 0\n      }\n    }\n  ]\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/Wz_i_ysNwkc\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Financial ratios are oftentimes used to screen potential equity investments by identifying companies that meet specific criteria. This analysis may be used in the creation of a portfolio. Alternatively, it may form part of a more thorough analysis of potential investment targets.<\/p>\n<p>Fundamental decisions must be made in regard to the metrics to use as screens, the number of metrics to include, the value of the metrics to use as cut-off points, and the weighting that each metric should be given.<\/p>\n<p><a style=\"display: block; margin: 20px 0 28px; padding: 14px 18px; border: 2px solid #2563eb; border-radius: 12px; text-align: center; color: #2563eb; text-decoration: none; font-weight: 500; font-size: 15px; background-color: #ffffff;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Practice equity screening and financial analysis questions. <\/a><\/p>\n<h2><strong>The Use of Financial Analysis in Screening Potential Equity Investments<\/strong><\/h2>\n<p>A simple stock screen may include the following criteria:<\/p>\n<ul>\n<li>a valuation ratio, for example, the P\/E ratio, which is less than a specified value;<\/li>\n<li>a solvency ratio, for example, total debt\/assets, which does not exceed a specified value;<\/li>\n<li>positive net income; and<\/li>\n<li>the dividend yield is greater than a specified value.<\/li>\n<\/ul>\n<p>These criteria are often not independent. Some criteria will serve as checks on the results obtained from applying other criteria. Additionally, the results of stock screens can sometimes be relatively concentrated in a subset of the sectors that are represented in the benchmark.<\/p>\n<p>Although they are most common among value investors, stock screens can be used by growth investors, value investors, and market-oriented investors. Growth screens typically feature criteria related to earnings growth and\/or momentum. Value screens usually feature criteria that set upper limits for the value of one or more valuation ratios. Market-oriented screens do not strongly emphasize valuation or growth criteria.<\/p>\n<p>Back-testing can be useful in the evaluation of how a portfolio based on a screen would have performed historically. It applies the portfolio selection rules to historical data and computes what returns would have been earned if a particular strategy had been used. Its relevance to investment success may be limited due to the following limitations:<\/p>\n<ul>\n<li><strong><em>survivorship bias<\/em><\/strong>: if the back-testing database eliminates companies that cease to exist, the remaining companies collectively will appear to have performed better;<\/li>\n<li><strong><em>look-ahead bias<\/em><\/strong>: if restated financial data is included in a database, there will be a mismatch between what investors would have known at the time they invested and the information used in the back-testing; and<\/li>\n<li><strong><em>data-snooping bias<\/em><\/strong>: this can occur when a model is built based on previous findings, and then the same database is used to test the model.<\/li>\n<\/ul>\n<blockquote>\n<h3><strong>Question 1<\/strong><\/h3>\n<p>Which of the following statements is the <em>least<\/em> accurate?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">The criteria used in stock screens are often independent.<\/li>\n<li data-tadv-p=\"keep\">Value screens usually feature criteria that set upper limits for the value of one or more valuation ratios.<\/li>\n<li data-tadv-p=\"keep\">Back-testing may not provide a reliable indication of future stock performance because of survivorship bias, look-ahead bias, or data-snooping bias.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>The criteria used in stock screens are often <strong>not<\/strong> independent.<\/p>\n<p>Options B and C are accurate statements.<\/p>\n<h3><strong>Question 2<\/strong><\/h3>\n<p>Which of following criteria should an analyst include when screening potential equity investments based on return on equity?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li data-tadv-p=\"keep\">Positive net income.<\/li>\n<li data-tadv-p=\"keep\">Negative shareholders&#8217; equity.<\/li>\n<li data-tadv-p=\"keep\">Negative cash flow from operations.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Requiring that net income be positive would eliminate companies that report a positive return on equity only because both net income and shareholders\u2019 equity are negative.<\/p>\n<p>This makes options A accurate and option B inaccurate.<\/p>\n<p><strong>C is incorrect.<\/strong> Negative cash flow from operations would most likely indicate that the analyst should probably not invest in the company.<\/p>\n<\/blockquote>\n\n\n<div style=\"text-align:center; margin:42px 0 10px;\">\n\n  <a href=\"https:\/\/analystprep.com\/free-trial\/\"\n     target=\"_blank\"\n     rel=\"noopener noreferrer\"\n     style=\"\n        display:inline-block;\n        padding:14px 34px;\n        background-color:#3f78d7;\n        color:#ffffff;\n        text-decoration:none;\n        font-weight:600;\n        font-size:18px;\n        border-radius:40px;\n        line-height:1.1;\n     \">\n     Start Free Trial\n  <\/a>\n\n  <p style=\"\n        margin-top:14px;\n        max-width:640px;\n        margin-left:auto;\n        margin-right:auto;\n        font-size:16px;\n        line-height:1.5;\n     \">\n     Solve CFA-style FRA questions and strengthen your equity analysis and screening skills.\n  <\/p>\n\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Financial ratios are oftentimes used to screen potential equity investments by identifying companies that meet specific criteria. This analysis may be used in the creation of a portfolio. Alternatively, it may form part of a more thorough analysis of potential&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-3989","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Screening for Equity Investments | CFA Level 1<\/title>\n<meta name=\"description\" content=\"Learn how to apply screening criteria to identify potential equity investments with desired characteristics. Explore key methods in investment analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Screening for Equity Investments | CFA Level 1\" \/>\n<meta property=\"og:description\" content=\"Learn how to apply screening criteria to identify potential equity investments with desired characteristics. Explore key methods in investment analysis.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2019-10-08T13:33:00+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-02-25T16:49:18+00:00\" \/>\n<meta name=\"author\" content=\"Simon\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Simon\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/\"},\"author\":{\"name\":\"Simon\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#\\\/schema\\\/person\\\/8d6352b658ba58a707920fba950b3687\"},\"headline\":\"Screening for Potential Equity Investments\",\"datePublished\":\"2019-10-08T13:33:00+00:00\",\"dateModified\":\"2026-02-25T16:49:18+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/\"},\"wordCount\":586,\"articleSection\":[\"Financial Reporting and Analysis\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/\",\"name\":\"Screening for Equity Investments | CFA Level 1\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#website\"},\"datePublished\":\"2019-10-08T13:33:00+00:00\",\"dateModified\":\"2026-02-25T16:49:18+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#\\\/schema\\\/person\\\/8d6352b658ba58a707920fba950b3687\"},\"description\":\"Learn how to apply screening criteria to identify potential equity investments with desired characteristics. Explore key methods in investment analysis.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/financial-reporting-and-analysis\\\/screening-potential-equity-investments\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Screening for Potential Equity Investments\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/#\\\/schema\\\/person\\\/8d6352b658ba58a707920fba950b3687\",\"name\":\"Simon\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/wp-content\\\/uploads\\\/2016\\\/09\\\/analystprep-150x150.png\",\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/wp-content\\\/uploads\\\/2016\\\/09\\\/analystprep-150x150.png\",\"contentUrl\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/wp-content\\\/uploads\\\/2016\\\/09\\\/analystprep-150x150.png\",\"caption\":\"Simon\"},\"url\":\"https:\\\/\\\/analystprep.com\\\/cfa-level-1-exam\\\/author\\\/analystprep\\\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/Wz_i_ysNwkc\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"2531\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2019-10-08T13:33:00+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Screening for Equity Investments | CFA Level 1","description":"Learn how to apply screening criteria to identify potential equity investments with desired characteristics. Explore key methods in investment analysis.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/","og_locale":"en_US","og_type":"article","og_title":"Screening for Equity Investments | CFA Level 1","og_description":"Learn how to apply screening criteria to identify potential equity investments with desired characteristics. Explore key methods in investment analysis.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2019-10-08T13:33:00+00:00","article_modified_time":"2026-02-25T16:49:18+00:00","author":"Simon","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Simon","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/"},"author":{"name":"Simon","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"headline":"Screening for Potential Equity Investments","datePublished":"2019-10-08T13:33:00+00:00","dateModified":"2026-02-25T16:49:18+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/"},"wordCount":586,"articleSection":["Financial Reporting and Analysis"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/","name":"Screening for Equity Investments | CFA Level 1","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2019-10-08T13:33:00+00:00","dateModified":"2026-02-25T16:49:18+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687"},"description":"Learn how to apply screening criteria to identify potential equity investments with desired characteristics. Explore key methods in investment analysis.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/screening-potential-equity-investments\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Screening for Potential Equity Investments"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/8d6352b658ba58a707920fba950b3687","name":"Simon","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/09\/analystprep-150x150.png","caption":"Simon"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/analystprep\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/Wz_i_ysNwkc","og_video_type":"text\/html","og_video_duration":"2531","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2019-10-08T13:33:00+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/3989","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=3989"}],"version-history":[{"count":33,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/3989\/revisions"}],"predecessor-version":[{"id":59169,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/3989\/revisions\/59169"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=3989"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=3989"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=3989"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}