Our Screening Methodology

Two-Stage Screening Process

Shariah stock screening is not a single test. It is a two-stage process that evaluates both the nature of a company's business and the composition of its financial statements. A stock must pass both stages to be considered halal under any given standard.

1Stage 1: Business Activity Screening determines whether a company's core business involves activities that are impermissible (haram) in Islam. If a company's primary revenue comes from a prohibited industry, it fails immediately and no further financial analysis is performed.

2Stage 2: Financial Ratio Screening evaluates the company's balance sheet to ensure its debt levels, cash holdings in interest-bearing instruments, accounts receivable, and income from impermissible sources all fall below the thresholds set by each Shariah standard.

Stage 1: Business Activity Screening

Companies whose primary business involves any of the following activities are automatically classified as not halal, regardless of their financial ratios. This reflects the fundamental Islamic principle that one should not profit from haram activities.

Excluded Sectors and Activities

Our screening engine checks the company's sector classification, SIC codes, and business description to identify involvement in any of 28 prohibited activity categories. If a company derives its primary revenue from any of these, it is excluded from the halal list across all five standards.

Stage 2: Financial Ratio Screening

Companies that pass the business activity screen are then evaluated against four financial ratios. These ratios ensure that a company's financial structure does not rely excessively on debt, interest-bearing instruments, or impermissible income. Different standards use slightly different thresholds and denominators.

The Four Key Ratios

1. Debt Ratio — Total interest-bearing debt divided by the denominator (market capitalization or total assets). Measures how leveraged a company is with conventional debt.
2. Cash & Interest-Bearing Securities Ratio — Cash and short-term investments held in interest-bearing instruments divided by the denominator. Ensures the company does not hold excessive interest-generating assets.
3. Receivables Ratio — Accounts receivable (and sometimes cash) divided by the denominator. Limits exposure to debt-like instruments on the balance sheet.
4. Impermissible Income Ratio — Revenue from haram activities (interest income, alcohol sales, etc.) divided by total revenue. All five standards agree this must be below 5%.

Thresholds by Standard

The following table shows the exact thresholds we apply for each of the five Shariah screening standards. A stock must have all four ratios below the stated thresholds to pass that standard.

How We Calculate Each Ratio

For full transparency, here is exactly what we use in each calculation:

• Total Debt: Long-term debt plus current portion of long-term debt from the balance sheet (interest-bearing obligations only).
• Cash & Interest-Bearing Securities: Cash and cash equivalents plus short-term investments. This captures funds held in conventional interest-bearing accounts.
• Accounts Receivable: Net accounts receivable as reported on the balance sheet.
• Impermissible Income: Interest income and other non-operating income from haram sources, divided by total revenue.
• Market Capitalization: Current share price multiplied by total shares outstanding (trailing 12-month average or most recent).
• Total Assets: Total assets as reported on the most recent balance sheet.

Data Sources

We source our financial data from multiple publicly available databases to ensure accuracy and coverage across global markets.

Update Frequency

Accuracy depends on timely data. Here is how often we update each type of information:

• Financial statements: Updated when new quarterly (10-Q) or annual (10-K) reports are filed, typically within days of public release.
• Market capitalization: Updated regularly to reflect current share prices, which directly affects ratio calculations for AAOIFI, DJIM, and S&P standards.
• Business screening: Sector classifications and haram activity flags are reviewed and updated as companies change their business models or enter new markets.
• New stocks: We regularly add newly listed companies and expand our coverage to additional exchanges.

Limitations and Important Disclaimers

While we strive for the highest accuracy, there are inherent limitations to any automated screening process:

• Automated screening cannot capture every nuance. Some companies may have subsidiary activities that are not reflected in their primary sector classification.
• Financial data relies on what companies report. Off-balance-sheet items, unreported activities, or delayed filings can affect accuracy.
• Market capitalization fluctuates daily. A stock that passes screening today may fail tomorrow if its share price drops significantly (increasing the debt-to-market-cap ratio).
• Our screening is algorithmic. It does not replace the judgment of a qualified Islamic scholar who may consider additional factors beyond the standard financial ratios.