Shariah stock screening basics, explained simply

If you want your investments to line up with Islamic principles, at some point you meet a screening report: a company with a green tick, three percentages and a footnote naming a standard you have never heard of. This is an explanation of what those numbers mean and why two reputable sources can disagree about the same company.

Nothing here is a fatwa or investment advice. It is a description of how the widely used screens work so you can read them yourself.

Stage one: what does the business actually do?

The first screen asks whether the company's core activity is permissible. Conventional banking and insurance, alcohol, tobacco, pork products, gambling, adult entertainment and conventional interest-based lending are excluded outright, regardless of how healthy the balance sheet is.

The complication is mixed revenue. A hotel group is a legitimate business that may also serve alcohol; a supermarket sells many things. Screening bodies handle this proportionally: income from non-compliant activity must remain below a small share of total revenue, commonly around 5%. Above that line the company fails no matter what its ratios look like.

Stage two: the financial ratios

A permissible business can still fail on how it is financed, because interest-based debt is itself the issue. Three ratios are typically evaluated:

Debt ratio — interest-bearing debt as a proportion of the divisor. Thresholds are commonly 30% or 33%.

Cash and interest-bearing securities — how much of the company is effectively parked in interest-generating instruments, against the same divisor and a similar threshold.

Accounts receivable — receivables against the same divisor, reflecting concerns about trading in debt.

The divisor is where standards diverge

That word "divisor" is doing enormous work. Some standards use total assets. Others use average market capitalisation over a trailing period, often 12 or 24 months.

This is not academic. Total assets move slowly; market capitalisation moves with the share price. A company with unchanged debt can pass on a total-assets basis and fail on a market-cap basis simply because its shares fell 40% that year. Same company, same balance sheet, different verdict.

So when two screening services disagree, the first question is not "who is right?" — it is "which divisor, which threshold, and which averaging window?"

Purification

A company can pass every screen and still earn a small amount of interest income, typically from cash deposits. Purification is the practice of giving away the corresponding portion of your dividend income to charity, without claiming it as a tax-deductible donation in the view of many scholars.

The common calculation is: the proportion of non-compliant income to total income, applied to the dividends you received. If 2% of revenue was non-compliant and you received £100 in dividends, roughly £2 would be purified. Screening tools produce an indicative figure; the calculation is ultimately yours.

Compliance is not permanent

This is the point most often missed. A company's ratios change every reporting period. A holding that was compliant when you bought it can drift out of compliance after a debt-funded acquisition, and back in after a repayment. That is why watchlists and re-screening on new filings matter more than a one-off check at purchase.

Practical questions to ask of any screening report

1. 1.Which standard produced this verdict, and does it match what I follow?
2. 2.Which divisor was used — total assets or market capitalisation?
3. 3.What reporting date do these figures come from?
4. 4.How close is each ratio to its threshold?
5. 5.What is the non-compliant revenue proportion, for purification?

Where tools help and where they do not

A screening tool is a calculator that saves you from reading annual reports and dividing numbers by hand. It cannot make a religious ruling for you, and any tool presenting a single unexplained green tick is hiding exactly the information you need. That is why we built Shariah Signal to show the ratios, the thresholds and the source standard alongside the verdict.

For anything material, verify against the company's own filings and speak to a scholar you trust.