🔍 How to Research a Company
When it comes to individual stocks, the hardest thing is evaluating them. Here's the exact framework we use — the 7-point checklist and the financial metrics that matter most.
The 7-Point Evaluation Checklist
Is it publicly traded?
Verify the company is listed on a major exchange — NYSE, Nasdaq, etc. If it's private, you can't buy shares through a standard brokerage.
Check the historical price chart
Look at the 5, 10, and 15-year charts. Does the stock trend upward over time despite inevitable dips? Long-term upward momentum is a positive signal.
Review the financials
Read the income statement, balance sheet, and cash flow statement. We break these down below. Healthy finances are the foundation of a good investment.
Read the regulatory filings
The 10-Q (quarterly) and 10-K (annual) reports are the company's official financial filings with the SEC. They're detailed, honest, and free on the SEC's EDGAR database.
Research the leadership
Who is the CEO, CFO, COO? What's their track record? Have they built successful companies before? Strong leadership is a leading indicator of long-term performance.
Read shareholder letters and news
What is the CEO communicating to investors? Are they transparent? Are earnings meeting expectations? What's the analyst sentiment? These signals matter.
Understand the business model
Can you explain in one sentence how this company makes money? If you can't, that's a red flag. Invest in what you understand.
Understanding Financial Statements
Income Statement
Four things to track: Revenue (total earnings before expenses — is it growing year over year?), Cost of Revenue (should stay stable or decrease relative to revenue growth), Gross Profit (revenue minus costs — look for consistent increases), and Net Income (final profit after all expenses — must stay positive for long-term viability).
Balance Sheet
Assets (what the company owns), Current Assets (convertible to cash within 12 months), Liabilities (what the company owes), Current Liabilities (due within 12 months), Stockholders' Equity (what's left after debts). The relationship between these numbers tells you whether the company is financially stable or overleveraged.
Cash Flow Statement
Focus on Free Cash Flow — the money remaining after operating expenses and capital expenditures. Positive free cash flow means the company can pay down debt, expand, pay dividends, or buy back shares. Companies can show accounting profits while burning cash. Free cash flow doesn't lie.
Key Formulas Every Investor Should Know
Working Capital
Current Assets − Current Liabilities
Demonstrates short-term liquidity. Negative working capital signals vulnerability to economic downturns — the company may not be able to cover short-term obligations.
Debt-to-Equity Ratio
Total Liabilities ÷ Shareholders' Equity
Target range: 1.0 to 1.5 or below. Industry-specific — banks typically run higher than energy companies. Reveals how much the company relies on debt versus equity to finance operations.
Price-to-Earnings Ratio (P/E)
Current Share Price ÷ Earnings Per Share (EPS)
The S&P 500 historically averages a P/E in the mid-20s. A P/E of 25 means you're paying $25 for every $1 of earnings. Higher P/E = higher growth expectations priced in. N/A or negative P/E = unprofitable (but not always a deal-breaker — Tesla and Amazon ran negative P/E for years before becoming category leaders).