The Best Value Stock Screening Criteria — What Numbers to Filter On

Not all screening criteria are created equal. You can filter on hundreds of data points — analyst ratings, moving averages, short interest, social media sentiment — but most of that noise has nothing to do with whether a business is trading below its intrinsic value. Value investors need a tighter, more disciplined set of filters. The right criteria don't just find cheap stocks. They find stocks that are cheap for the right reasons.

Disclaimer: This article is for educational and informational purposes only. Nothing here constitutes financial advice, a recommendation to buy or sell any security, or an invitation to invest. All investing involves risk, including the possible loss of principal. Always do your own research and consult a qualified financial professional before making any investment decisions.

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Why Your Criteria Matter More Than Your Screener

Two investors can use the exact same tool and come away with completely different results, just by changing their filters. The screener is neutral — it returns whatever you ask for. That means the quality of your results depends almost entirely on the quality of your inputs.

Value investing has a long tradition of identifying criteria that correlate with genuinely cheap, quality businesses. Benjamin Graham laid much of the groundwork in the early twentieth century. Warren Buffett refined it. Decades of academic research have validated the core insight: stocks trading at low multiples of earnings, book value, and cash flow tend to outperform over long periods. The key is combining multiple metrics rather than chasing any single number.

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The Core Screening Criteria

1. Price-to-Earnings Ratio (P/E) — Target: Below 15

The P/E ratio divides a stock's price by its earnings per share. It answers a simple question: how much are you paying for each dollar of profit?

A P/E below 15 has historically been the starting threshold for value investors. Graham himself used this benchmark. At 15x earnings, you're paying a reasonable price for a dollar of earnings — not a premium. At 8x or 10x, you may be getting a genuine discount.

Use trailing twelve-month earnings, not forward estimates. Analysts' forward projections are often optimistic. Actual reported earnings are facts.

2. Price-to-Book Ratio (P/B) — Target: Below 1.5

Book value is the net worth of a company on paper: total assets minus total liabilities. When a stock trades at or below book value — a P/B of 1.0 or less — you're potentially buying assets for less than they're worth on the balance sheet.

A P/B filter under 1.5 keeps you in bargain territory. This metric works especially well for capital-intensive businesses like manufacturers, banks, and industrial companies, where assets are a meaningful component of value.

For asset-light businesses (software, professional services), book value matters less. Know the type of company you're screening for.

3. EV/EBITDA — Target: Below 10

Enterprise Value to EBITDA is a more sophisticated valuation measure that accounts for capital structure. It compares the total cost to acquire a company (market cap plus debt, minus cash) against its earnings before interest, taxes, depreciation, and amortization.

Because it includes debt and cash in the numerator, EV/EBITDA is better than P/E for comparing companies with different balance sheet structures. A reading below 10 generally indicates a cheap acquisition price relative to operating earnings. Below 7 starts to look genuinely deep-value.

4. Return on Equity (ROE) — Target: Above 15%

Cheap isn't enough if the business can't generate returns on the capital invested in it. ROE measures how efficiently a company converts shareholder equity into net income.

An ROE consistently above 15% signals a business with a competitive edge — something that allows it to earn good returns without needing massive outside capital. This is the quality filter that separates undervalued businesses from value traps.

Avoid companies with ROE propped up by excessive debt. A highly leveraged company can show a high ROE while actually being fragile.

5. Debt-to-Equity Ratio (D/E) — Target: Below 0.5

This is the safety filter. A D/E below 0.5 means the company has far more equity than debt — it's conservatively financed and has room to absorb bad years without existential risk.

Debt magnifies both gains and losses. A company with a strong balance sheet can survive recessions, industry disruptions, and unexpected expenses. A heavily indebted company can be wiped out by the same events.

For banks and financial companies, D/E doesn't translate directly — use tier-1 capital ratios instead.

6. Positive Free Cash Flow

Free cash flow is what's left after a company pays for its capital expenditures. It's the closest thing to real, spendable profit that a business generates.

A company with positive FCF can reinvest in growth, pay dividends, buy back shares, or pay down debt — all without needing to raise outside capital. Companies burning cash depend on markets staying open to them. That's a hidden risk that doesn't show up in an earnings per share figure.

Always verify that reported earnings are backed by actual free cash flow. Divergence between the two is a warning sign.

7. Dividend Yield — Context Dependent

Dividend yield is useful as a supplementary filter, not a primary one. A 3–5% yield from a company with positive FCF and a conservative payout ratio is attractive. A 10% yield from a company with declining earnings is usually a sign that a dividend cut is coming.

When screening by dividend yield, also apply a FCF filter to confirm the dividend is sustainable.

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The Graham Number — A Composite Valuation Tool

Benjamin Graham developed a formula that combines earnings and book value into a single intrinsic value estimate:

Graham Number = √(22.5 × EPS × Book Value Per Share)

The logic behind 22.5: it represents a stock trading at no more than 15x earnings and no more than 1.5x book value simultaneously (15 × 1.5 = 22.5).

When a stock's market price is below its Graham Number, it may be trading below intrinsic value by Graham's standards. This is a useful sanity check after running your primary screen — not a standalone buy signal, but a valuable data point.

The Value of Stock screener includes the key metrics discussed here so you can apply these filters directly without building a custom spreadsheet.

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Combining Criteria: Why One Metric Is Never Enough

A low P/E alone tells you a stock is cheap relative to earnings. It doesn't tell you whether the business is good, whether the balance sheet is sound, or whether earnings are real.

A high ROE alone tells you the business is efficient. It doesn't tell you whether you're paying a fair price for it.

The power comes from combining multiple metrics. A stock with a P/E below 15, P/B below 1.5, ROE above 15%, D/E below 0.5, and positive FCF is hitting every note at once. Those are rare — but when you find one, it's worth serious attention.

Start broad, add criteria progressively, and always follow the screen with qualitative research.

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Actionable Takeaways

• Lead with P/E and P/B — these two filters alone will eliminate most overpriced stocks and surface cheap candidates quickly.
• Add ROE as a quality gate — low price + high ROE is the combination that finds genuinely undervalued, good businesses.
• Use D/E to filter out fragile companies — cheap stocks with bloated balance sheets are often cheap for a reason.
• Check FCF against reported earnings — divergence between the two is a warning sign worth investigating.
• Calculate the Graham Number as a cross-check — if a stock is below its Graham Number and passes your other filters, you have a strong candidate worth deep research. Use valueofstock.com/screener to filter efficiently.

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This article is for informational and educational purposes only and does not constitute investment advice. The author and publisher are not responsible for any investment decisions made based on this content. Past performance is not indicative of future results. Please consult a licensed financial advisor before investing.

— Harper Banks, financial writer covering value investing and personal finance.