Suggestions for Conducting a Quick Analysis of a Stock

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Let’s say you want to do a quick analysis of a stock. Perhaps you’re just looking to give the tires a good kick. Alternatively, you rely on charts and want to make sure the fundamentals are in your favor… or at least not against you. What should you look at?

The following will give an overview of some of the key things I look at. The suggestions are not meant to be a comprehensive guide to everything you should consider. They may also leave you exposed to risks that further research would have identified. They will cover a lot of ground, however, and are certainly better than not conducting any of your own research.

Valuation Ratios: You simply don’t want to overpay for a stock. Lower valuation ratios (price-earnings, price-to-book, price-to-sales, price-to-cash flow, etc.) are better than higher ones. Very high price-earnings and price-to-book ratios can also signal low levels of earnings or book value, respectively.

Earnings Estimates: Look to see if analysts are raising their forecasts (good) or cutting them (bad). Also, check to see if the company is beating forecasts or missing them. Finally, check growth. Are earnings projected to rise or fall?

Financial Statements: There is no substitute for looking at the financial statements. Not just for the current year, but for past years. Five to seven years will give you a good idea of the growth trends in sales, profits, cash flows and dividends. Start with the income statement and then go to the cash flow statement. Look to see if cash from operations is consistently positive (it’s a negative sign if it isn’t) and whether it’s greater than income after taxes (if cash flow is smaller, the company might be aggressive with its accounting practices). Scroll down to, or calculate, free cash flow (cash from operations less capital expenditures). Free cash flow should be positive for most years. Finally, glance at cash from financing. Positive numbers for cash from financing indicate that the company has raised cash either through debt or by selling stock. Jump over to the balance sheet and compare shareholder equity to total liabilities; disproportionately high liabilities imply the company is laden with debt.

Financial Ratios: Gross and operating margins will quickly tell you if the company is becoming more or less profitable. Rising asset turnover ratios are a sign of improving efficiency. Companies using share buybacks to reduce the net number of shares outstanding will have positive buyback yields. The payout ratio will reveal if the dividend is sustainable. Stock Investor Pro subscribers can also see the Piotroski F-Score; scores of six or higher are preferable.

10-K: The 10-K is an annual filing required by the Securities and Exchange Commission. You can locate it, and other regulatory filings, on EDGAR. Scan through it to understand what the company does and what its potential risks are. If something seems suspicious or otherwise not right, trust your gut and find a different stock to invest in.

Earnings Releases: I find it helpful to look at the 10-K first or in conjunction with the earnings statement. This is particularly the case if the company’s executives are using internal or industry lingo. Determine how the company has performed, the reasons for the performance and what the executives expect to happen in the foreseeable future. You’ll find the earnings releases on a company’s investor relations website. You may also find it useful to read the conference call transcript, which can be found on Seeking Alpha (call up the quote page for the stock and then click on “earnings”).

Presentations: Many companies publish slides from their presentations on their investor relations websites [thank the SEC’s Regulation Fair Disclosure ("Reg FD") for this.] The slides can provide a good overview of the business and what trends management is seeing.

If this seems like a lot, it’s not. You can do all of this analysis in about 10 to 15 minutes. The analysis won’t identify all risks, but it will give you a good sense of whether or not a stock is attractive. It’s certainly much better than not doing any research or relying on someone else’s opinion. I will add that if you have a few extra minutes and have access to brokerage research, call up the reports to see if there is something important you overlooked.