What financial ratios make a stock halal?

Ratio 1, interest-bearing debt. Add up the company's interest-bearing borrowings (bank loans, bonds and notes) and divide by its market capitalization. AAOIFI sets the ceiling at 30%. Liabilities that carry no interest, such as ordinary supplier payables, are not counted. Because the denominator is market value, the ratio moves with the share price: a company whose market value falls can cross the line without borrowing anything new.

Ratio 2, interest-bearing deposits and securities. Add cash held in interest-paying accounts, term deposits, and interest-bearing investments such as bonds and treasury bills, and divide by market capitalization. The AAOIFI ceiling is again 30%. Cash held in non-interest accounts or in Shari'a-compliant instruments is not counted. This test catches cash-rich companies that earn much of their return from interest rather than from their business.

Ratio 3, non-permissible income. Divide income from prohibited sources, chiefly interest earned plus any revenue from incidental prohibited activity, by total revenue. AAOIFI tolerates up to 5%. Unlike the other two ratios, this one also sets your purification: the same share of your dividends and realized gains is given away, without seeking reward for it.

The ratios come second. Before any arithmetic, the company's core activity must be permissible: conventional banking and insurance, alcohol, gambling, tobacco, pork products and adult entertainment fail at that stage, whatever the balance sheet looks like. The 30% and 5% limits are tolerances for incidental exposure in an otherwise permissible business, not a licence to own a prohibited one.

How the index methodologies differ. The Dow Jones Islamic Market indexes divide debt, cash and interest-bearing securities, and receivables by the 24-month average market capitalization, each with a 33% ceiling. S&P Shariah indexes use the 36-month average market capitalization, with 33% for debt and for cash and interest-bearing securities, and 49% for receivables. MSCI Islamic and FTSE Shariah indexes divide by total assets instead of market value, with a one-third ceiling for debt and for cash, and a receivables-plus-cash ceiling of one-third (MSCI) or one-half (FTSE). All of them cap non-permissible income at 5% of revenue. A market-value denominator moves with the share price; a total-assets denominator moves only with the balance sheet. On a borderline company those choices can flip the verdict.

Where the Ja'fari tradition stands. The percentage thresholds above are scholarly ijtihad codified by AAOIFI and the index providers, and they sit in the Sunni juristic tradition. The Ja'fari school has no equivalent codified ratio standard: jurists, including the office of Ayatollah Sayyid Ali al-Sistani, frame the question around the company's primary activity and the investor's own share in any impermissible portion, and that share is discharged through khums and radd al-mazalim rather than percentage purification. A Shia investor can still use the AAOIFI ratios as a practical first filter and follow their marja's guidance on the interest-income portion.

Reading a screener's output. A good screen shows each ratio against its limit and the date of the screen, not just a bare verdict. On HalalScreener every stock page shows the verdict and the debt ratio against the 30% limit for free, with the deposits and income tests and the purification share in Pro, and re-screens as new filings and prices arrive.