Can you use market cap instead of total assets when screening stocks

Investment Questions and Chats Stocks
#1

Assalamu Alaikum,

I hop you and the team are well. Is it acceptable to use market cap instead of total assets when screening stocks, even if it is an early growth stock. For example, NIO stock is classified as halal in Zoya app as they use debt to market cap ratio. However, when I looked at the latest balance sheet and used debt to total asset ratio, it looks like the debt to total asset ratio is more than 50%? I would like to ask your views on the acceptability of this stock and whether it is acceptable to use market cap ratio as listed on Zoya app. Also, you mentioned to calculate the average market cap for the past 3 years, how do we go about this as this information is not readily available online. I look forward to your response. JazakAllah khair

#2

Assalaamu alaykum,

Market cap and total assets are both acceptable denominators. Global and well recognised Shariah screenings use either market cap or total assets.

#3

Jazakhallah Khair for your response. My question is that if you are to use market cap ratio, how do you calculate the average market cap for the past 2-3 years? Also, if there is an early stock launched recently and only has the a market cap of one year, what do we do then? Do we wait for the stock to mature and invest after a couple years when we have more data in calculating the average market cap? Thank you.

#4

The average market capitalization of X over n months is calculated by multiplying the moving average daily closing
price of X over n months (Pavg) with the total number of shares outstanding
for X.

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