Peter Lynch's Stock Selection Criteria

Profit growth > 20 Lynch believed that companies with consistent earnings growth of at least 20% were likely to be good investments. This is because such growth rates indicate that a company is operating efficiently and can generate strong returns for shareholders. Sales > 500 Larger companies tend to have greater stability and resources. So, Lets select the companies with minimum annual sales figure of 500cr. PEG Ratio <1 The PEG (Price/Earnings-to-Growth) ratio is a valuation metric that takes into account a company’s earnings growth rate. Lynch favored companies with a PEG ratio of less than 1, as this indicates that the stock is undervalued relative to its growth prospects. Debt to equity < 0.2 Lynch believed that companies with low debt-to-equity ratios were better positioned to weather economic downturns and capitalize on growth opportunities. He preferred companies with a debt-to-equity ratio of less than 0.2. Price to Earning < 30 The price-to-earnings (P/E) ratio is a measure of a company’s valuation, calculated by dividing its current stock price by its earnings per share. Lynch generally looked for companies with P/E ratios below 30, as higher ratios suggest that a stock is overvalued. Price to Cash Flow > 20 Lynch also used the price-to-cash-flow ratio as a valuation metric. He favored companies with a ratio greater than 20, as this indicates that the stock is undervalued relative to its cash flow. Return on equity > 15 Finally, Lynch favored companies with strong return on equity (ROE) figures, as this indicates that a company is generating strong returns for its shareholders. He looked for companies with ROE figures above 15%.

by sravankumar