Evaluating a Stock

Stocks are a fundamental investment vehicle used in most portfolios and can be evaluated in many ways. In some ways, there is almost too much information available to consider with many stocks, so this guide will help walk you through some of the more important factors to consider in your evaluation. The cornerstone tool in evaluating a stock is an assessment of the financial performance of the company, though there are several additional factors to consider.

Financial Performance

In the beginning stages of stock evaluation, any investor should have a strong grasp on the financial wellbeing, or lack thereof, of the stock in question.
This starts with looking at the income statement, balance sheet, and cash flow statement of a company, all of which are available for public companies.

After accessing these reports, an investor will want to answer a few core questions:

Is the company consistently profitable?

Fundamentally for a company to pay dividends to shareholders, and see its share value appreciate, it should likely be profitable. Looking not only at the current years’ net income but also past years to see how income is trending is important.

Does the company have a positive operating cash flow?

This aspect of a company’s financial performance will show if they are generating enough cash from operations to accomplish several important things, like paying dividends and financing future growth and expansion.  A company can be profitable but still see negative operating cash flows, which can make the company’s stock relatively less attractive.

How healthy is the balance sheet?

While many analysts focus on income and cash flow it is also important to consider the assets and liabilities of a company, particularly when making a longer term investment.  Looking at how current assets (those that will mature in 1 year) compare to current liabilities is important to assess the short-term ability to pay amounts owed.  Also, looking at how debt compares to equity, how much of the company is debt financed, is important to consider as a highly leveraged company has less ability to absorb losses.

Other Evaluations

In addition to the pure financial information, there are other sources of information to use when evaluating a stock to ensure a more comprehensive perspective is given.

Analyst Reports

Analyst reports are a good way to determine how financial professionals view a stock. Many analysts have access to information that the average investor may not have or could easily overlook. The reports can also provide expected financial targets and provide some perspective that differs from that of the average investor.

Press Releases and Conference Calls

These media focused publications allow an investor the opportunity to evaluate what the management of a company have to say and where they are headed in terms of the direction of the company. Special attention should be given to earnings calls, as an investor can typically listen in first hand to the CEO talking about the company's performance and future expectations.

Combined, these sources will provide a foundation for the assessment of any stock.  Financial information and history are important, but so is the future direction of a company and the expectations of both management and analysts.
By Jeffrey Glen

Copyrighted 2020. Content published with author's permission.

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