Your Next Great Stock: How to Screen the Market for Tomorrow's Top Performers

Chapter 9. Where the Numbers Come From

Most of the stock-screening metrics you'll base searches on are what I like to think of as baked goods. Consider the price/earnings ratio. It's made up of three raw ingredients: share price, earnings, and number of shares outstanding. (It's really the price/earnings-per-share ratio.)

One of those ingredients without the others doesn't tell you much about a stock. You can't begin to consider whether a company with $35 million in earnings last year has inexpensive shares unless you know how many shares the company has been split into and how much each of those shares costs.

In the next chapter, we'll learn which baked goods you should use to search for profitable companies, growing companies, well-managed companies, and so on. In this chapter we'll see where the raw ingredients that make up those baked goods come from. You can skip ahead, of course, but understanding the ingredients will help you in three ways. First, you'll have a better feel for baked goods like return on equity if you know where its ingredients, earnings, and equity come from and what they measure. Second, some screeners let you bake your own goods using a list of raw ingredients and a formula builder. I want you to know how to do that. Third, by knowing where all the ingredients come from, you'll be better equipped to do further research on your screen survivors.

Data providers are companies that fetch raw ingredients from their original sources and stuff them into databases, ...