We have around 4,000 companies listed on the stock market in India. How do you make stock selection? You might think that it is difficult to track so many companies to find a worthwhile one, but it actually is a very easy job. Just focus on the universe of stocks which fits into basic investment principles. We apply some very basic criteria and are left with only a handful of companies, and then it is much easier to keep an eye on them. The inverse pyramid shows how companies get eliminated at each step of every basic criterion. The criteria are also listed in the figure.
To give you an idea of very basic financial health statistics based just on two very important ratios, return on equity (RoE) and return on capital employed (RoCE), we have prepared the graphic with circles. The figure shows how many companies have the latest and the five-year average RoE and RoCE more than various cut-offs. You will be left with only a select number of companies to inquire into. We have taken the universe of the companies to be 1,298 actively traded companies.