Analysing a stock
Read the financial statements, judge valuation, profitability, debt and growth, and understand the business behind the share.
The three financial statements
Behind every share is a real business, and its financial statements show how healthy that business is. Learning to read a few key figures helps you judge a company rather than just its share price.
Read →Price is not the same as value
The price of a share is what you pay for it today. Its value is what it is actually worth based on the underlying business. The two are related but often differ, and telling them apart is at the heart of investing.
Read →How to analyse valuation: P/E, P/B, EV/EBITDA and PEG
Valuation ratios compare a company's share price or total value with what it earns or owns, so companies of different sizes can be compared.
Read →Profitability: margins, ROE and ROIC
Profitability ratios show how much of each unit of sales a company keeps as profit and how well it uses the money invested in it.
Read →Debt and financial strength
Financial strength is a company's ability to pay its debts and survive bad years; debt ratios and cash show how much room it has.
Read →Growth: revenue, earnings and dividends
Growth metrics show how fast a company's sales, profit and dividends are increasing - and whether that growth is steady or a one-off.
Read →Cash flow and free cash flow
Cash flow shows the money that actually moves in and out of a company; free cash flow is what is left after the investments needed to keep the business running.
Read →Dividends and payout ratio
A dividend is part of the profit that a company pays out to its shareholders, usually in cash. It is one of the two main ways shares can reward you, alongside a rising price.
Read →Understanding the business
Doing your own research means understanding an investment before you commit money to it, rather than acting on a tip or a headline. It is one of the most important habits an investor can build.
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