How To Quickly Analyse A Company Before Investing

Stock Club recently posted an interesting way of finding top-performing stocks by quickly analysing their financial statements. Understanding a company by reading their financial statements is a key part to successful investing.

Balance Sheets

1. Increasing cash is good

2. Increasing debt and total shares outstanding is bad

While the financial statements (Balance sheet, Income and Cash flow) are released every quarter, the balance sheet is probably the most important. You can find this information on Yahoo Finance. This document lists the assets and liabilities of the company.

Long Term Debt

It is important to see the total debt decreasing and to compare the amount of debt from the same previous year. If the debt has risen, try to find out why.

Total Shares Outstanding

This is the number of shares available to buy right now. If this number is going down, it’s a good sign and shows that the company is buying them back. However, if they are increasing, investors are being diluted and this is a bad sign.

Cash & Equivalents

The amount of cash a company has on hand. More cash than debt is good. If cash has gone down- try to find out why.

Understanding the financial statements is important for the financial analysis of a company

Cash Flow

1. Positive cash flow means more cash went into the company than out

2. When cash flow is negative, they are losing money

When a company is cash positive, they can control their debt obligations and they are in control, a negative cash flow means they might go bust or they are raising money. The easiest way to determine if a company has more cahs than debt is if the enterprise value is greater than the market cap.

Enterprise value (EV) = Market Cap. — Cash + Debt where market cap is the value of the number of shares outstanding and enterprise value is the total value of the company.