How to invest in the ASX: A framework to find quality shares for your portfolio

There are more than 2,300 stocks on the ASX. Most aren’t worth your time, and they won’t make you money. That’s not a criticism, it’s the reality of a market that spans everything from world-class compounders to capital-starved microcaps.

As Munro Partners' CIO Nick Griffin often says:

Equity markets are made up of just a handful of exceptional companies, and thousands and thousands of mediocre ones.

That is where stock screening earns its keep, helping you to find the needles in the haystack. It won’t make decisions for you, nor spit out a list of automatic buys. Rather, it takes an overwhelmingly large universe and cuts it down to something manageable, sensible, and worth investigating further. In other words, it helps investors move from possibility to plausibility.

The key is choosing factors that reflect what you actually want to own. For the sake of the exercise below, the goal was not to find the cheapest stocks, the fastest growers, or the highest-quality businesses in isolation. It was to identify companies showing a credible blend of profitability, growth, cash generation, and valuation support.

Starting with the full ASX universe of 2,332 stocks, I applied a small number of forward-looking financial measures with clear hurdle rates. Each filter was designed to remove a different kind of weak candidate, whether that meant poor margins, low returns, weak cash flow, or growth that looked too extreme or too expensive.

Screens are good, but they are not perfect

Factor screens don’t just find stocks; sometimes, they reveal the market regime. If your screen returns only one sector, it's likely that all you’ve identified is bias.

In putting together this wire, I tried multiple iterations of various screens, just as any investor should. The first pass cut the list to 22 names, but also revealed a clear bias toward mining stocks. So, I refined the model, careful not to gravitate too much towards curve fitting.

Curve fitting (or overfitting) is when you design a model that explains past data perfectly but does so by capturing noise, quirks, or one-off conditions rather than durable relationships. It looks great in hindsight, but tends to break down when applied looking forward.

This model is not curve-fitted in a statistical sense, but it has been refined with the benefit of hindsight to produce a more balanced and usable outcome, again, for the sake of the exercise.

The screen: What matters, and why

This screen is designed to identify reasonably priced, profitable growth businesses while filtering out extreme, low-quality, or highly cyclical outliers.

PEG (1yr Fwd) between 0.5 and 2.0

What it is: The PEG ratio (Price/Earnings-to-Growth) divides a company’s P/E ratio by its expected earnings growth rate, helping relate valuation to growth. It is typically calculated using forward earnings and forward growth estimates. A PEG below 1 is often interpreted as “undervalued” relative to growth, while above 1 may suggest a richer valuation—but this is highly context-dependent.

Why it matters: PEG connects valuation with expected growth, making it more informative than P/E alone when screening for growing businesses. Using a range (rather than a single cutoff) is deliberate: it excludes both the market’s most expensive growth stocks and ultra-low PEG names, which are often driven by cyclical peaks or unreliable forecasts. The result is a middle ground of more reasonably priced growth.

EBITDA margin (1yr Fwd) > 10%

What it is: EBITDA margin (Earnings Before Interest, Taxes, Depreciation and Amortisation as a percentage of revenue) measures operating profitability before capital structure, tax, and non-cash accounting effects. A forward EBITDA margin uses analyst estimates for the next year.

Why it matters: Margins are a useful first-pass filter for business quality. Forward EBITDA margin provides a cleaner view of expected operating profitability, but it ignores capital intensity, working capital needs, and reinvestment requirements. A 10% threshold helps exclude structurally weak operators while still allowing for asset-heavy industries. It should be assessed alongside cash flow and returns on capital.

Sales growth (1yr Fwd) between 5% and 80%

What it is: Sales growth measures the change in a company’s revenue over time, typically year-on-year. Forward sales growth reflects expected revenue expansion based on analyst estimates.

Why it matters: Revenue growth confirms underlying demand, but extremes can mislead. Setting both a floor and a ceiling is important: the lower bound ensures the business is actually expanding, while the upper bound filters out distortions such as one-off events, cyclical rebounds, acquisitions, or low-base effects.

EPS growth (1yr Fwd) between 5% and 80%

What it is: Earnings per share (EPS) growth measures how profit attributable to each share is changing over time. Forward EPS growth is based on analyst forecasts and reflects expected profit expansion.

Why it matters: EPS growth provides the bottom-line counterpart to revenue growth. Used together, they help identify companies where growth is translating into profitability. However, EPS can be influenced by share buybacks, margin changes, cost cuts, and one-off items. The range captures meaningful growth while excluding unsustainably large spikes.

Return on Equity (ROE) (1yr Fwd) > 12%

What it is: Return on Equity (ROE) measures how effectively a company generates profit from shareholders’ equity, expressed as net income divided by equity. Forward ROE uses expected earnings relative to current or projected equity.

Why it matters: ROE is a widely used proxy for business quality, indicating how efficiently capital is deployed. However, it can be artificially elevated by high leverage or shrinking equity bases. A 12% threshold strikes a balance - high enough to filter out weaker businesses, but not so restrictive that it excludes entire sectors. It is best assessed alongside leverage and return-on-capital metrics.

EV/EBITDA (1yr Fwd) > 8

What it is: EV/EBITDA compares a company’s enterprise value (equity + debt − cash) to its operating earnings before non-cash charges. Using forward EBITDA reflects expected operating performance.

Why it matters: Rather than targeting the lowest multiples, this screen uses EV/EBITDA to avoid the market’s most heavily discounted stocks, which are often cheap for structural or cyclical reasons. A floor of 8 tilts the screen toward businesses with some degree of quality or market confidence, without restricting the universe to only premium valuations.

FCF growth (Latest) > 0

What it is: Free Cash Flow (FCF) growth measures the change in cash generated after capital expenditures. Using the latest period reflects the most recent direction of cash generation rather than a forecast.

Why it matters: Free cash flow is a key validation of earnings quality, indicating whether reported profits are converting into cash. It can be volatile due to timing of capital expenditure and working capital movements. A simple positive growth requirement is intentional: the goal is not to find the fastest growers, but to ensure cash generation is improving.

So, which stocks currently make the cut?

(Scroll right to see all the data)

Results of a stock screen focussed on quality, strong cash flow, sustainability and growth.

Where to from here?

A stock screen is useful because it narrows the field. It helps you move from a market of more than 2,300 names to a shortlist that is at least directionally interesting. But that is all it does. It tells you which companies may deserve your attention, not which ones deserve your capital.

A company can pass every hurdle in the model and still be a poor investment. Forecasts can prove too optimistic. Margins can peak. Cash flow can reverse. A “reasonable” valuation can still be expensive if the market has misread the durability of growth. Equally, a stock that fails the screen may still be worth owning if there is a compelling turnaround, asset, or strategic angle that the numbers do not yet capture.

So the right way to interpret this list is as a research shortlist, not a buy list. What the screen has done is identify businesses that, on current forward estimates, appear to offer a credible mix of growth, profitability, cash generation, and valuation support. That is a far better starting point than trawling blindly through the market, but it is still only a starting point.

Practical next steps

Once you have your shortlist, the job is to work through it systematically.

1. Understand what the business actually does Before looking at the stock, look at the company. What does it sell? Who does it sell to? What drives revenue, margins, and returns? If you cannot explain the business model in a few sentences, keep digging.

2. Test whether the growth is real and repeatable The screen captures forward growth, but not its quality. Ask whether sales and earnings growth are being driven by structural demand, cyclical tailwinds, acquisitions, or easy comparisons. The more repeatable the driver, the more valuable the growth.

3. Check whether margins and returns are sustainable A high EBITDA margin or ROE is attractive, but only if it lasts. Look for signs of pricing power, competitive advantage, cost discipline, and industry structure. If the numbers are elevated because conditions are unusually favourable, be careful.

4. Verify the cash flow story Positive free cash flow growth is a good sign, but it should be tested. Is cash conversion consistent over time? Is working capital behaving normally? Are there one-offs flattering the number? Profitability on paper is not enough.

5. Look at valuation in context Even good companies can be bad investments if bought at the wrong price. Compare the stock’s valuation to its own history, its peers, and the durability of its growth outlook. A premium multiple can be justified, but only if the business keeps delivering.

6. Identify the risk that breaks the thesis Every idea needs a bear case. What would cause the stock to disappoint? Slowing demand, commodity prices, customer concentration, regulation, balance sheet stress, execution risk, competition, or simply over-optimistic forecasts. Know the risk before you own it.

7. Read what management is saying, then test it Go through results presentations, investor days, and transcripts. Understand the company’s strategy, but do not accept the story at face value. Compare management’s promises with the numbers and with what competitors are seeing.

8. Decide whether the stock fits your portfolio A good stock is not always the right stock for you. Consider how it fits with your existing exposures, risk tolerance, and time horizon. Do you already own similar businesses? Are you doubling up on one sector or factor without realising it?

A simple checklist

Before moving any screened stock onto a watchlist, investors should be able to answer 'yes' to most of the following:

• Do I understand the business model?

• Can I explain what is driving growth?

• Do the margins and returns look sustainable?

• Is cash flow supporting the earnings story?

• Is the valuation sensible relative to the opportunity?

• Do I know the key risks?

• Have I read the latest result or presentation?

• Does this stock improve my portfolio, rather than just add to it?

If the answer is 'no' to several of those questions, the stock may still be interesting, but it is probably not yet investable.

That is the real lesson from any screen. The value is not in producing a list. The value lies in producing a list that is short enough and sensible enough to begin genuine research.

Happy hunting.

This article first appeared on Livewire on Tuesday 21 April 2026.