Stock Analysis Guide for Investor: Essential criteria to invest in the company's stock

Aug 4, 2020 03:51 AM ET
Stock Analysis Guide for Investor: Essential criteria to invest in the company's stock

How to Perform High-End Analysis

Analysis refers to any audit, review, or investigation performed by a party to research and verify facts related to a matter under consideration. In the context of the financial world, it refers to an examination of financial records and metrics before entering into any transactional agreement with another party.  

Investors should consider a number of different factors when performing stock research and analysis if they rely on themselves. This includes revenue, valuations, company capitalization, management, risks, and competitors. Investors can make well-informed decisions that align with their overall investment strategy if they perform a deep study on a stock before purchasing. 

Steps to Analyze Your Future Investment

  • Market Capitalization: One of the first steps one must take to screen stock market opportunities is to look at the company’s capitalization. This is a reflection of the total dollar market value of its outstanding shares. The market capitalization of a company provides information about the potential size of the company’s end markets, the broadness of the ownership as well as the volatility of the stock.
    Investors should note that they shouldn’t make any final judgments regarding the stock. The information regarding market capitalization becomes more important when examining it with other vital figures such as revenue and profit. 

  • Margins, Revenues, Profits: Margins, revenues, and profits are the main financial numbers of a company one should look at while performing analysis. By using company financial reports in which investors search for detailed company information, one should take a look at a company’s net income and revenue trends for the past 2 years.
    Sites such as these provide other important financial figures such as Price to Sales ratio (P/S) and Price to Earnings ratio (P/E). They should examine whether growth is consistent or choppy and if there are any major swings more than 50% in any direction. Investors can find information regarding profit margin from quarterly and annual financial statements. They should check whether it is rising, falling, or remaining stable. 

  • Valuation Multiples: In this step, one should examine the Price/earnings to growth ratio or PEG of the company in question, as well as some of its competitors. Any large discrepancies between the competitors and the company should be noted. The initial basis for looking at valuations is the company’s P/E ratio. Earnings have a high probability of volatility, even in the case of the most stable companies. One can easily perform instant comparisons to direct competitors or broad market multiples by considering valuations based on trailing earnings or current estimates. 

Examining a few years’ worth of net earnings figures can ensure that the most recent figure is accurate and does not include any charge or one-time adjustment.
One should examine the P/E ratio in conjunction with the Price to Sales and Price to Book ratios.  Multiples such as this highlight a company’s valuation as it relates to annual revenues, the balance sheets, and its debt. Reviewing the same figures for some of the company’s competitors is also an essential step since ranges in values can differ between industries.

  • Balance Sheet: Investors should take a look at the overall level of assets and liabilities via its consolidated balance sheet. They should pay special attention to the cash levels as well as the company’s long-term debt. They should also take a look at the company’s debt to equity ratio to find out the company’s positive equity. 

When performing analysis, if the balance sheet figures of the company change substantially from one year to the next, one should try to determine the reason why. 

  • Who rules the company? Apart from looking at the financial figures of the company, one should try to shed some light on the company’s ownership and management. They should look at the size and track record of the management team, gather background information about them, and the experience they have. 

Another point to check here is whether the management or founders hold a lot of shares in the company. High ownership by top managers is preferable, while low ownership is a potential problem. 

  • Competition: Once investors have gotten a fair idea about the company’s size and its earnings, it is time to look at the industries and sectors it operates in, particularly it’s competitors. Every company is partially defined by the quality and level of competition it has, and one should compare margins of at least 2 to 3 competitors. One can determine the size of the addressable markets of companies just by looking at their major competitors. 

Investors can find the ticker symbols of the particular company, along with direct comparisons with competitors, based on specific metrics. Sometimes, one can get a clear idea about how a company’s business model works by finding out more about their competitors. 

  • Stock Price History and Technical Analysis: A vital step during analysis is to check out both short-term as well as the long-term price movement of the shares of the company and how long they have been trading. They should check whether the price of the stock has been volatile or consistent or choppy. One can predict future stock movement just by finding out the profit experience of the average owner. Stocks with greater volatility tend to have short-term shareholders. This can add extra risk for many investors. 

  • Expectations and Guidance:  In this step, one should try to find out profit estimates and the consensus revenue for the next 2 to 3 years. Other company-specific details about joint ventures, partnerships, intellectual property new products or services would provide a much deeper understanding of the company’s qualities and long-term prospects. 

  • Risks: Last, but not the least, one should always make sure they are fully aware of the risks inherent with what they are investing in.  They should try to find out both company-specific as well as industry-wide risks and look at potential investment from a critical point of view. 

Some useful questions that one should ask include: 

    •  Is the management taking decisions which are aiming at increasing the company’s revenue?

    • Are there any outstanding regulatory or legal matters that can resurface in the future? 

    • Is the company environmentally-friendly and to what degree?

    • What long-term risks could result from either embracing or not embracing eco-friendly initiatives? 

Potential investors should always picture the worst-case scenarios for their stocks beforehand and think about the potential outcomes. 

Final Words

After one completes all the above steps related to analysis, they can easily picture how the particular stock might fit into their investment strategy or portfolio. It will also assist them in evaluating the company’s future profit potential. The above guidelines contain all of the vital steps that one should not miss, even though they should research some further specifics down the road before making the final decision. 

While making choices, investors should never be afraid to put a particular company away for further review and start with a fresh idea and new company. This is because of the vastness of the stock market where there is a myriad of stocks and opportunities.


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