Stocks
How to Analyze a Stock: A Repeatable Checklist
Same steps, same order, every company. That is what makes the output comparable, and comparability is the only edge in this that survives a bad month.
Most bad analysis is not ignorance. It is disorder. You read whatever surfaced first about a company, in whatever depth the internet happened to offer, and you end up with twenty names researched twenty different ways and no basis for ranking them. Fix the order and the quality follows. Six steps, always the same, always in this sequence: business, numbers, valuation, catalysts, chart, size.
Step one: what the company sells
Write two sentences on what it sells and who pays for it. If you cannot do that from memory after twenty minutes with the filings, you cannot value it, and no amount of ratio work will rescue that. Then four questions.
How much of revenue is recurring against one-time? Contracted revenue is more predictable than revenue that has to be won again next year.
How concentrated are the customers? A 10-K discloses any customer worth more than 10% of revenue. Two customers at 40% of sales means you own a company that is one renegotiation from being a different company.
What stops a competitor taking the business? Switching costs, scale, regulation, network effects, brand. Each one works differently and each one erodes.
How does it make money at the unit level? Gross margin by segment tells you more about competitive position than the consolidated figure ever does.
Step two: five years of numbers
One year is an anecdote. Pull five so the trend is visible. The source is the filings. How to read an earnings report covers what each document holds.
Work with a hypothetical company: revenue of $6.5bn growing 9% a year, an 18% operating margin, shareholders equity of $3.25bn, total debt of $2.0bn, cash of $0.6bn, and interest expense of $110m.
Operating income is $6.5bn x 18% = $1.17bn. At a 21% tax rate, after-tax operating profit is $1.17bn x 0.79 = $924m.
Step three: what it earns on the capital it uses
Invested capital is equity + debt - cash = $3.25bn + $2.0bn - $0.6bn = $4.65bn. Return on invested capital is $924m / $4.65bn = 19.9%.
A business earning roughly 20% on the capital it employs, against a cost of capital nearer 8% or 9%, creates value every time it reinvests a dollar, and that gap is the engine behind every long-run compounder anyone has ever pointed at. It matters more than any single quarter. A business earning less than its cost of capital destroys value as it grows, which is why revenue growth on its own is a meaningless thing to celebrate.
Step four: two ratios off the balance sheet
Net debt to EBITDA is ($2.0bn - $0.6bn) / $1.18bn = 1.2 times. Comfortable for most industries.
Interest coverage is $1.17bn / $110m = 10.6 times. Operating profit covers the interest bill ten times over.
| Check | Hypothetical company | What raises a question |
|---|---|---|
| Revenue growth, 5 year trend | 9% and steady | Decelerating three years running |
| Operating margin direction | 18%, up from 16% | Falling while revenue grows |
| Return on invested capital | 19.9% | Below the cost of capital, or falling |
| Net debt to EBITDA | 1.2x | Above about 3x outside utilities and property |
| Interest coverage | 10.6x | Below about 3x |
| Operating cash flow vs net income | Cash flow higher | Net income persistently above cash flow |
| Diluted share count trend | Falling 2% a year | Rising 3% or more a year |
The last two rows catch most accounting problems without any further work. Profits booked ahead of the cash arriving, and a share count creeping up through stock compensation while the company advertises large repurchases, are the two patterns worth checking every single quarter. Earnings quality and accounting red flags goes through the rest of them.
Step five: now look at the price
Not before. Doing valuation last stops the current quote from framing everything you just read, and that framing effect is stronger than people believe.
At $80 a share with earnings per share of $4.00, the price to earnings ratio is $80 / $4.00 = 20, and against expected earnings growth of 15% the PEG ratio is 20 / 15 = 1.33.
Compare that multiple against three things: the company’s own five-year range, the direct competitors, and what the multiple implies about future growth. People skip the third. Run a discounted cash flow model in reverse and it tells you what growth rate the current price already assumes, and if that rate exceeds anything the company has achieved in its history, the question stops being whether the stock is cheap and becomes whether the market is right.
Which multiple suits which company is in stock valuation basics. Do the arithmetic in the P/E ratio calculator and the cash flow version in the DCF calculator, changing one assumption at a time so you can see which input the answer actually rests on.
Step six: catalysts with dates on them
A catalyst is a specific, datable event that could change how the market prices the company: an earnings report, a product launch, a regulatory decision, a contract renewal, a debt maturity. List them with dates next to them. A thesis with no catalyst inside two years is a thesis you will get bored of and sell for the wrong reason.
Step seven: falsifiers, written before you buy
This step matters more than the catalysts and gets skipped more often. Write three conditions that would mean you are wrong, stated as numbers. Revenue growth below 4% for two consecutive quarters. Gross margin below 40%. The largest customer failing to renew.
Written before you buy, those turn a decision to sell into a rule you follow. Written after you buy, they get edited. Everyone edits them. That is why they go on the page with a date on them.
Step eight: the chart, used narrowly
Price structure tells you where other participants have transacted, which is useful for entry and for placing risk. What the business is worth is a separate question, answered above.
Three things are worth a look: the direction of the 200-day moving average, the levels where the stock has repeatedly turned, and whether recent moves came on heavy or light volume. A company you have already valued, trading into a level that has held several times, is a better entry than the same company on the day it gaps higher on news. Technical analysis for beginners is honest about the limits of what any of this can tell you.
Step nine: size
Finish with what can go wrong and how much you have riding on it, listing the two or three things that would permanently damage the business: a patent expiry, a regulatory change, a debt wall in a year when refinancing is expensive, a single supplier.
Then set position size from the strength of the work. A single stock at 20% of the portfolio makes one company’s regulatory outcome your outcome. Sizing is also the only part of this entire process you fully control, which is a strange thing to leave until last and then decide in ten seconds.
Find candidates with the stock screener, then test how well you read the source documents with the reading earnings reports quiz, and if the account underneath all of this is still being set up, start at how to invest in stocks.
Frequently asked questions
How long should it take to analyze a stock?
A first pass to decide whether a company is worth more time takes about thirty minutes: the business model, five years of revenue and margins, the balance sheet, and one valuation multiple. A full workup with the filings, the competitors and a cash flow model takes several hours. Running the same order every time is what makes the fast version reliable.
What is the difference between fundamental and technical analysis?
Fundamental analysis asks what a business is worth by studying its earnings, cash flow and competitive position. Technical analysis studies price and volume to judge what other participants are doing. They answer different questions, and using price structure to time an entry into a company you have already valued is the common way to combine them.
What is return on invested capital and why does it matter?
It is after-tax operating profit divided by the capital the business uses, meaning equity plus debt minus cash. It measures how much profit the company generates from every dollar tied up in it. A business consistently earning more on new capital than its cost of capital creates value each time it reinvests, which is what compounds over years.
How do I know when my thesis is wrong?
By writing down the specific conditions before you buy: the growth rate that has to hold, the margin that must not fall below a level, the customer or product the story depends on. When one of those written conditions breaks, the thesis is broken regardless of what the share price is doing. Without the written version, every fall becomes an excuse to average down.
How many stocks should I research before buying one?
Enough to have a comparison, which in practice means looking at the direct competitors of any company you are considering. A screen might surface twenty names, a first pass rejects most of them in half an hour each, and a handful get the full treatment. The rejected ones are where most of the value of the process comes from.
Do I need to build a discounted cash flow model?
Not for every company, and it is worth building for any position large enough to matter. The value of a DCF is less in its output than in forcing you to state a growth rate, a margin and a discount rate explicitly. Small changes in those inputs swing the answer widely, so treat the result as a range and check what growth rate the current price already implies.