Step 1 – Company’s Capitalization

Market capitalization speaks a lot on its stock’s volatility, broadness of ownership, and potential size of its end markets. Upon reviewing revenue and profit data, the market cap will give you some viewpoint. What stock exchange the shares trade on? Or are they American depository receipts (ADRs) with a listing on a foreign exchange.

Step 2 – Revenue, Profit, and Margin Trends

Next, begin with the revenue, profit, and margin trends? Obtain the company’s revenue and net income trends for the last two years at general finance websites, which have links to quarterly and annual reports of companies. You may also use a quick calculator to validate its price-to-sales (P/S) ratio and price-to-earnings (P/E) ratio. Check if the recent trends have choppy or consistent growth, or if there are major swings in either way. Evaluate the margins, too, to determine whether these are increasing, declining, or remaining the same.

Step 3 – Rivals and Industries

Size up the industries where it operates and its rivals. Compare the margins. Take note also of the differences between competitors to assess more the company. By doing so, you can find out the end markets for its products. Major research sites post these details in company profiles, normally along with the ticker or direct comparisons, enabling you to review a list with certain metrics for both the company and its competitors.

Step 4 – Valuation Multiples

Jot down any huge discrepancies between competitors for further review. Remember that it is not unusual to become more interested with the target firm’s rivals. This is fine as long as you still look to follow through with the initial due diligence and do additional research on the other firm at the same time.

There are times earnings will experience some volatility, but valuations based on trailing earnings or current estimates serve as barometer, which allows instant comparison to broad market multiplies or direct competitors. It is ideal to assess a few years’ worth of net earnings so the most recent earnings data is neutralized.

Look at the P/E in connection with the price-to-book (P/B) ratio, enterprise multiple, and price-to-sales (or revenue) ratio. These multiples emphasize the company’s valuation relative to its annual revenues, debt, and balance sheet.

Step 5 – Management and Share Ownership

Figure out whether the company is still being managed by its founders, or its management and board is constantly shuffling. The firm’s age plays a big factor here. To get the extent of the top managers’ experiences, look at their consolidated bios, found on the corporation’s website or SEC filings. Check also if the founders and managers hold a big percentage of shares, and the float being held by institutions. Shareholders are best served when the individuals operating the company have high stake in the stock’s performance.

Step 6 – Balance Sheet Exam

A cursory examination will do for an initial due diligence. To see the overall level of assets and liabilities, look at the firm’s consolidated balance sheet, specifically their cash levels and amount of long-term debt. Examine the debt-to-equity ratio to know the amount of positive equity the corporation has. For better perspective, compare this with their counterparts.

Step 7 – Stock Price History

Nail down the longevity of all classes of shares in terms of trading, and also its short-term and long-term price movement. This will present the profit experience the average stock owner has noticed, which can affect future stock movement.

Step 8 – Stock Options and Dilution Possibilities

Assimilate the target corporation’s 10-Q and 10-K reports. Quarterly SEC filings are mandated to display all outstanding stocks and conversion expectations in a range of future stock prices. This will help you understand the way share count can change under several price scenarios. Watch out for shady practices or any formal probes made into illegal practices.

Step 9 – Projections

Do some more digging by knowing the consensus revenue and profit projections for the next two or three years and long-term trends influencing the industry, as well as specific details on intellectual property, joint ventures, and new products or services.

Step 10 – Risks

You cannot just invest without knowing the industry-wide and company-specific perils. Discover if there is a spotty history with the management, or outstanding legal or regulatory matters. Is the firm eco-friendly? What type of long-term risks could lead to embracing (or not embracing) green initiatives? This is where devil’s advocate comes in. Imagine worst-case scenarios and its potential results on the stock.