Shopping for a car is similar to researching a stock. Specs are essential, but also consider how the vehicle feels on the road, the reputation of the manufacturer, and whether the color of the interior will conceal dog hair. For stock research of this type, investors have a term: fundamental analysis.
You evaluate a stock by considering several factors, such as its financials, track record, leadership, stock rover review, and current competition, to decide whether it should be added to your portfolio. You can read Motley Fool Options Review to get more information about it.
- Collect your stock research materials
Review the financial statements of the company. In quantitative research, a few documents are pulled from the company’s filings with the government. SEC:
Detailed, independently audited financial statements are included in Form 10-K. This page describes its revenues and expenses, its revenue sources, and how it handles its cash.
Form 10-Q: Quarterly report on business and financial operations.
A brokerage firm’s website or major financial news websites will provide highlights of the above filings and important financial ratios. Comparisons of performance can help you determine which candidates are worth your investment dollars.
- Concentrate on what matters
A lot of numbers are in these reports, and it’s easy for them to become confusing. Get familiar with a company’s measurable inner workings by focusing on the following items:
The revenue a company earned during the specified period. The top line of the income statement page is the first item you’ll notice when you see one.
The total amount of money refers to the “bottom line” a company has made after operating taxes, expenses, and depreciation is subtracted from revenue in the income statement.
Earnings and earnings per share (EPS)
It can be measured by dividing the number of available shares by earnings of trade. It is a way to compare companies based on profitability per share.
Price-earnings ratio (P/E)
A company’s trailing P/E ratio can be calculated by dividing its current stock price by its earnings per share – normally over the past twelve months. Stock price divided by forecasted earnings gives you forward P/E. A stock’s value is determined by how much an investor is willing to spend for a dollar’s worth of its current earnings.
Return on equity (ROE), Return on assets (ROA)
Profit generated by a company for each dollar invested reveals its return on equity in percentage terms. Equity belongs to the shareholders. Return on assets shows what percentage of profits a company generates with each dollar of its assets.
- Analyze qualitatively
Qualitative research gives you more in-depth details about a company’s operations and prospects than quantitative research does. Stocks should not be bought for the sake of rising prices but to own a company. You purchase a stake in a business when you buy stocks.The following questions will help you screen potential business partners:
What is the company’s revenue model?
Some cases are obvious, such as a clothing retailer that sells clothes. Still, sometimes it isn’t, such as a fast-food company that makes most of its money from franchising or an electronics company that grows through consumer financing. Consider investing in companies that make sense to you.
Is this company competitive?
Consider how the business can’t be copied, equaled, or eclipsed. A company’s brand, business model, innovation capability, patent ownership, operational excellence, and distribution expertise, for example, are among these aspects. Competitive advantage increases as the moat become harder to breach.
What is the management team like?
Leadership plays an essential role in the business’s success. It is possible to read the transcripts of company conference calls and annual reports to find out a great deal about management.
Are there any possible pitfalls?
It’s not about short-term developments that may affect a company’s stock price but about long-term stability and growth, so look for red flags that might indicate a problem.