Financial screening is the quantitative component of Shariah compliance assessment for stocks. It evaluates a company's financial statements against predetermined thresholds to ensure the business is not excessively reliant on interest-based financing or deriving significant income from impermissible sources.
The key ratios examined typically include: total debt divided by market capitalization (or total assets), cash and interest-bearing securities divided by market capitalization, and interest or non-permissible income divided by total revenue. Under the AAOIFI standard, these ratios generally must remain below 30% for a stock to pass financial screening.
Different screening bodies use slightly different methodologies. The AAOIFI standard uses market capitalization as the denominator for most ratios, while the Dow Jones Islamic Market Index uses trailing 24-month average market capitalization. The S&P Shariah Index uses total assets as the denominator. These methodological differences can lead to different compliance verdicts for the same stock.