What makes the stocks tick? Analyze a financial statement and study the following items:

Margin. Check the trends to find out if a company is moving in the right direction. Every investor wants high margins and trends in a stock. They can look for such by computing the following fundamental margins:

  • EBITDA margin - The margin pictures the company’s operation costs. It encompasses all the costs related to creating and selling a products, excluding depreciation, amortization, and other non-cash costs, as well as interest payments on debt and taxes.

  • Gross margin - It refers to the difference between revenues and the expenses related to manufacturing the goods sold. But the margin does not consider the costs connected to the product, including research and development costs, and selling and general administrative costs.

  • Net margin - Expressed as a percentage, this shows the net profits to revenues for a specific business or company. Those with great net margins tend to exhibit strong performance, resulting in higher profitability.

Prices and Valuation. For most average traders, the actual stock price reflects the real value of a company. However, it only shows how many shares an investor can purchase for a particular investment. The actual price is only significant if it will be used as a multiple to compute various ratios, such as price-to-book, price-to-earnings, and price-to-sales. Multiples are not isolated but compared to its counterpart in the firm’s historical range or similar industry. It can also be seen in terms of cycle.

Profitability ratios. The ratio indicates a firm’s profitability in the past. Investors want ratios that exhibit high and improving trends over time. Some of the common profitability ratios include return on assets, return on equity, and return on investment.

What makes stocks tick? Margin, price and valuation, and profitability ratios. Actual stock price alone won’t represent the likelihood of an investment to be profitable. Hence, read and evaluate the financial statement and crunch the numbers.