Stock research is an integral part of investing, some information is free while other sources of information require payment. This article will highlight the free sources of information that can help a market participant diagnose a company fairly quickly.
Financial Statements
Financials are incredibly important a company will not be in business very long if they run out of money for operations. The longer a company is in business, the better the company’s chances of gaining customers and increasing market share.
Furthermore, a company cannot engage in extensive capital expenditures if they have declining revenues and increasing liabilities. In this way, more of a company’s earnings would be going towards servicing debt rather than growing the business.
Here’s where you can gain access to financial statements:
- Yahoo Finance’s App (Basic Financials)
To keep things simple, I’m going to give you a few key things to look for which can be done in 10 mins or less.
Yahoo Finance Financials
On Yahoo Finance’s app, search for a stock that you are interested in, then scroll down and navigate to details. Here you’ll be able to look at annual and quarterly revenues and earnings. You’ll want to make sure that the company you are interested in has been raising revenues steadily over the last 5 years, if earnings are also rising over that time period then it is certainly a good sign.
If the company is showing losses over that 5 year time period, you’ll want to make sure that losses are declining; or at the very least losses are increasing at a lower rate than revenues. Best case scenario is a net profit, followed by declining losses and rising revenues, and then losses increasing at a lower rate than revenues. If the company is in the latter of those 3 scenarios, it needs to be increasing market share while spending heavily on research and development (R&D). A company has to be making gains somewhere if it’s not turning a profit yet.
*Click the “View All” button that appears to the far right of the “Financials” text to see the breakdown of the income statement. You’ll be able to see revenues and expenses in a broken down format.
Balance Sheet
After clicking the “View All” button, select the “Balance sheet option, and you’ll get an overview of the annual and quarterly balance sheets. You’ll want to make sure that the company of interest has a history of increasing total cash and assets over the years. In addition, make sure that the company is keeping total liabilities under control, more on that below.
Ideally you’d like to see total liabilities declining year-over-year but in today’s world that’s rarely the case. At the very least it’s good to see that total liabilities are increasing at a lower rate than assets. If liabilities are increasing at a higher rate than assets it could be a sign of trouble.
You can run two ratios on the company to check the basic financial health:
- Quick Ratio = (Current Assets – Inventory – Prepaid Expenses) / Current Liabilities. This ratio is an indicator of a company’s short-term liquidity position. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets. In essence, its testing to see if a company can pay its short term bills with cash assets on hand. A normal quick ratio is considered to be 1, but the higher the ratio, the better a company’s liquidity and financial health.
- Debt – Equity Ratio = Total Liabilities / Total Shareholders Equity. This ratio will measure a company’s debt relative to the value of its net assets. A high debt-equity ratio is often associated with high risk, it means a company has been aggressive in financing its growth with debt. A good rule of thumb is that a debt-equity ratio should not exceed 2, although levels vary across industries.
Tracking Insider Trades
Tracking insider activity can provide insight into a company’s growth prospects. If company executives/insiders aren’t buying into the company, why should you buy in? Typically when insiders are buying into a company, it usually means that good things are coming on the horizon.
However, just because insiders are selling, it doesn’t mean that a company meltdown is on the horizon. Insiders may sell their shares for a variety of reasons like financing renovations, medical expenses, or even a vehicle purchase. On the other hand, if an insider is buying shares of their company, it’s usually because they believe in its future prospects.
You can track insider buying at www.marketbeat.com , simply search for your company and navigate over to the “Insider Trades” tab.
Tracking Market Share
It’s important to understand if the company that you’re interested in is a market leader. If your company leads the market, it has a natural advantage over its competition. If it doesn’t lead the market, you’ll need a convincing story as to how your company is going to compete with the leader and even steal customers.
Investing in market leaders can be a great strategy. In this way, you reduce the risk of a competitor rapidly stealing market share and hence revenue from the company you’re invested in. Looking for companies that have at least a 40% market share is good but 70% or greater signals absolute dominance.
Utilizing Google Alerts
Google Alerts makes tracking press on companies very easy through the use of automation. The application’s email updates makes it easy to understand the company, what people are saying about the company, and that company’s industry.
When you navigate to www.google.com/alerts you’ll want to set up an alert for the “company name” that you’re interested in. In addition, you can also set an alert for the “name of the industry” that your company operates in. For example, for Mastercard you can set alerts for “Mastercard”, “Credit Cards”, and “Credit Processing”. If you were interested in Tesla, your alerts would be “Tesla” and “Electric Vehicles”, it’s that simple.
Then you set the option for “At most once a day”, sources are “Automatic”, region is “Any”, and sources are “Only the best results”. Create the alert and sit back and relax while all the emails come through on a daily basis, make sure to open the emails and read the articles inside. This tool will help reduce the risk of being blindsided by an adverse news report that you didn’t already see coming.
It’s our belief that utilizing these strategies will not only help improve your trade success, it’ll also help reduce your losses. Trading in the stock market is an information game, those that have access to greater sources of information usually outperform those that don’t.
