How do I evaluate a company's financials before buying stock?

Question

I'm new to buying stock. What should I look for when evaluating a company's financials? How much debt is considered "too much"? How do I calculate the price to earnings ratio and what does that tell me?

Answer 1

The Securities and Exchange Commission website has some pages on tips. The link below is for some common considerations you might want to cover. Make it a sort of checklist.

On the BusinessWeek website there are explanations. The link below is for their "scoreboard" of the S&P500. Notice in the upper right over the list is a glossary. They describe what the columns mean. Click on one of the companies stock symbol links and you get further details on that company.

Good luck.

Answer 2

You should learn all you can about the income statement and balance sheet. The debt to equity ratio is the ratio of a companies total liabilities to its stockholder's equity (both are shown on the balance sheet). There is no exact number that is considered too much (or too little)... you should compare the ratio to the ratios of the other companies in that industry to get an idea of how well off they are. 2:1 could be a healthy ratio, or much higher might be desirable. If the company is expanding aggressively, it will take on a lot of debt, and also many companies make more money when relying heavily on debt financing. Of course it is better to have "too little" than "too much" but if a company doesn't have any debt, you might ask yourself if they could do better if they took some on. The price to earnings ratio is calculated by taking the market price of the stock and dividing it by the company's net income for the period. It tells you how much you are paying for each dollar in earnings and gives you an idea of the return on your investment. If the company you are looking at has a really high P/E, you might consider investing in another similar company that is "cheaper." In my opinion, the price to book value (book value is assets-liabilities) is more important because it tells you how much you pay for each dollar in assets you assume ownership of. these are just a few of the important ratios you should examine. Of course investing is just as much an art as a science, and while ratios are helpful, they don't tell the whole story and you shouldn't rely on them too heavily. For instance, just because a company is "cheap" doesn't mean it is a good investment (what if it goes bankrupt?). Good luck.

Answer 3

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Answer 4

100k is too much

Answer 5

You don't. (That's my job)