In this guide, you will first gain a strong and practical understanding of the crucial determinants of a company’s performance. Next, a section will be dedicated to explaining each of the key ratios, coupled with the basics behind the 3 financial statements (balance sheet, income statement, and cash flow statement). Finally, we will uncover my personal favourite (and most self-explanatory) sites to perform analysis, allowing you to independently craft an effective and insightful report.

1. Understanding the Company.

The single most important driver of a company’s success is the problems which they solve with their core model. Try imagining a world without such company: What is missing?

Sector Operations

Hence, the first chunk of research that you should do is into ‘Sector Operations‘. Unfortunately, there are very limited resources online for finding detailed information about a company’s sections. The best way of finding their core values is by looking on the company’s own website. It should generally display what they do best, showing off successful operations and giving clients and analysts a clear picture of the value that can be received from their business.

Revenue & Net Income by Segment

Secondly, to find out where a company makes its profits, analysts must look at how much firms are making from each sector – determining what it is that they do which makes them the most profit. This is crucial since the company relies on such sections for their success.

Revenue by Region

Again, the firm will rely on countries that they are profiting from the most. This measure will assist your macroeconomic analysis later on, showing which economies to look into for political and economic stability which can impact the demand side of the stock.

Industry Role

Finally, understanding a company’s role within the industry is necessary for analysing their stock. A successful firm will always have a niche – an idea or product which they invented and personalised – to differentiate themselves and stay ahead of competition. Along with this, you want to look for examples of how the company can adapt to competition. A good example of this is in my article Blockbuster to Bust in the General Economics section of this publication: If adaptiveness is difficult to find, you may want to reconsider the firm’s future outlook in such a rapidly changing world.

Executive Summary

With all of this information and research that you have done, it is time to draft a concise overview of the company, what they do, and their main roles in the market.

2. Macro Trends

Stocks do not operate in a vacuum.

Political & Economic Catalysts

Following on from the revenue by region, there will often be many significant political and economic events occurring in any of these regions – and you must not miss out on them. Make sure you check out the financial times, along with any relevant news sources from the nation that you are researching; such free sources will often accurately describe effects of key regulatory or policy changes that are effecting the market. To delve even further, you can look at the relevant market in the economy (e.g. the tech industry in India) to see if there are any smaller financial changes that could be affecting competitors and industry leaders.

Supply Chain

While the regions where the firm makes revenue are highly important, so is the supply chain; it is vital that you also find statistics and visual representations on where they source their goods from. These are often not the countries that you would expect, adding another dimension to your macro analysis. Make sure that there are no conflicts affecting the production or exports of goods from these supplying economies.

3. Valuation

Overvalued – The price that shareholders are paying for a share is too high compared to the value that it holds – undervalued being the opposite

Here are my personal favourite metrics for determining whether a stock is overvalued or undervalued:

• Share Price v.s. Competitors: This shows you how much shareholders are paying for your stock compared to others in the industry. If they are paying significantly more, you must look into whether they are worth this much. This leads onto the next metric:
• P/E Ratio (Over Time): The P/E Ratio is calculated by the Share Price divided by the Earnings Per Share (in simple terms, the price people are paying for each share over the amount the company is making per share). This is a good determinant of how overvalued a firm really is. However, you must make sure to compare this with the industry competitors or else it is irrelevant. If a company has a higher P/E ratio than industry competitors, they have less value compared to how much people are paying for their shares than others, making them overvalued in their respective industry.
• However, the industry is not the only thing you must compare this ratio to. A good indicator of how the company is progressing is by observing how the ratio has changed over time (e.g. the last 5 years): If the P/E ratio is gradually decreasing, the firm’s earnings are catching up with their unfair valuation and shares are becoming more valuable and worth paying for – which in turn, implies that they will be gradually less overvalued in coming years.
• PEG Ratio: This is essentially a metric that visualises P/E ratio over time in one statistic – making it a growth-adjusted P/E ratio.
• P/S Ratio: Before explaining this, it is important to understand the difference between revenue and earnings: Revenue is a total income from a company selling its products, whereas earnings is revenue minus the expenses that the business operates under. The P/S Ratio is a simpler metric, taking into account only revenue (the price per share divided by the revenue per share). This is more useful when looking at less developed companies which have higher expenses.

Key Statistics

All of the relevant statistics to give you a sufficient overview of the companies financials:

1. ROCE (Return on Capital Employed) & CROCE (Cash Return on Capital Employed): Being arguably the best metric for a company’s financial strength, ROCE is a measure of how efficiently a company uses its capital to generate profits. The name is fairly self-explanatory – it is calculated by dividing the net operating profit (earnings before interest and taxes) by the amount of capital that was utilised for it. A higher ROCE suggests that the company is very profitable relative to its investments, while CROCE measures the ‘cash‘ return (this takes into account depreciation, amortisation, interest, and taxes, leaving the raw ‘cash’).
2. Beta & 52-Week Range: These are the two crucial measures that should be used to evaluate a stock’s volatility (how much the stock price fluctuates or is affected by market changes). The 52-week range is an indicator of the highest and lowest prices over the last year, displaying the recent changes in the stock’s price. Whereas the Beta is a measure of how much more the stock changes in percentage compared to its market, meaning that a Beta of more than 1 shows a stock that is more volatile than the market in which it is based.
3. Market Cap & Share Price: The first two metrics that one would see when keeping track of a stock: Market Capitalisation is the overall size of the company and the share price has been mentioned above.
4. Interest Cover: Found by dividing a company’s net operating profit by its interest expense in a given period, this value determines how many times over the firm can cover the interest that they have to pay on any borrowing/loans which are being issued to them.
5. Operating Margin: Also known as return on sales, the ratio represents profitability by measuring revenue after deducting operating expenses. It is calculated by dividing operating income by revenue and importantly deduces how much of generated sales are left when all of the firm’s operating expenses are paid off.
6. Free Cash Flow Per Share: This is measure of the company’s financial flexibility, which is measured by the free cash flow (remaining amount of cash after the firm covers capital expenditures) divided by the total number of shares.

Financial Statements

Balance Sheet

The balance sheet summarises a company’s financial position at a given point in time, focusing on three main categories: Assets, liabilities, and shareholders’ equity.

Segments:

• Assets: Assets are the resources (items of property) which the company has ownership of. They are divided into current (which they expect to liquidate within the next year) and non-current (long-term investments).
• Liabilities: Defined as the total amount that the company owes, they are similarly divided into current (e.g. short-term debts and payable notes or income taxes) and non-current (e.g. bonds, loans, pension obligations).
• Shareholders’ Equity: This is the total amount that shareholders would receive if all of the debts owed were paid. It is calculated as total assets minus total liabilities and determines the returns that a business makes in comparison to the total amount invested in them.

Key Ratios to Use:

• Debt-to-Equity Ratio: One of the most important metrics to see whether the company has financial leverage is by seeing how much debt they have relative to the shareholders’ equity.
• Current Ratio: This measures current assets over current liabilities, assessing the firm’s short-term liquidity.
• Return on Equity(ROE): Calculated by dividing net income by shareholders’ equity, this metric displays how profitable a company is in relation to how much is being held by stockholders. The higher the ROE, the more efficient a company’s management is at generating income and growth from its equity financing, similarly to the ROCE.

Income Statement

Income statements are used to evaluate a company’s financial performance over a specific period, similarly consisting of the three categories – revenue, expenses, and net income.

Segments:

• Revenue: The total amount of money a business earns before expenses.
• Cost of Goods Sold (COGS): Direct costs associated with producing goods or services
• Gross Profit: Revenue minus COGS calculates the total amount that the firm makes on selling goods.
• Operating Expenses: These are the costs related to running the business rather than selling the goods (e.g. marketing, R&D, salaries, and rent).
• EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation): The definition is sort of in the name – it measures their operating profitability before non-operating expenses (which include interest, tax, depreciation, and amortisation).
• Net Income (Bottom Line): This displays the company’s final profit after all expenses, taxes, and costs.

Key Ratios to Use:

• Net Profit Margin: Net income divides by revenue to measure to overall profitability of the company (i.e. how much of what comes in from sales is actually profitable).
• Operating Margin: Operating income divides by revenue to form a similar metric that indicates the efficiency in core operations.

Cash Flow Statement

The cash flow statement tracks the inflows and outflows of cash from the firm, also very similarly categorised into the sections: operating, investing, and financial activities.

• Operating Cash Flow (OCF): This is the cash that the company generates from core business operations. Generally, a high OFC indicates a healthy company.
• Investing Cash Flow: Like the name, investing cash flow is the cash generated from investments such as capital expenditures, acquisitions, or asset sales.
• Financing Cash Flow: This represents the cash flow that comes from issuing stock, borrowing, or repaying debt.
• Free Cash Flow (FCF): FCF is calculated as the operating cash flow minus capital expenditure, being a key indicator of how financially flexible the company is, based off of what they generate from their core business operations. I would personally suggest using this as the main measure deriving from the cash flow statement.

Key Ratios to Use:

• Operating Cash Flow to Net Income Ratio: This determines the quality of a company’s cash earnings by how well you are converting net income into cash flow. A higher ratio is generally positive.
• Cash Conversion Cycle: How quickly can a company turn inventory into cash?

Technical Analysis

Always watch out with technical analysis – you can’t rely on it, but it can be very helpful for identifying trends.

There are only two things that are arguably necessary to watch in the share price charts:

• Support & Resistance Levels: A support level is a price point where demand is strong enough to prevent further declines; it indicates where buyers would normally step in, creating a ‘floor‘ for the stock. If price is consistently approaching this point and consistently rebounding, it confirms a very strong support. A resistance level is the opposite, where selling pressure prevents further upward movement, acting as a price ‘ceiling’. An important note is that when the stock moves above a resistance level or below a support, it is signalling a breakout, creating opportunity for further gains or losses. There are also phycological levels such as round numbers ($50 or %100) which act as resistances or supports due to investor phycology and trading habits.
• Relative Strength Index (RSI): This is a momentum indicator which measures the speed and change in price, ranging from 0 to 100. Typically, an RSI above 70 indicates that the stock is overbought and below 30 indicates that it is oversold. The momentum helps to identify potential reversal points.

Board Management

A company’s leadership position adds some extra backing to its financial health and general strategy.

Founder-Led or Hired CEO?

Founder-led companies tend to consist of stronger visions and more long-term commitment. You can try to look into the motives behind why the founder is sticking with the company as a pose to selling it off: The top business owners such as Elon Musk, Jeff Bezos, and Jensen Huang are well beyond profit motivation. These companies also generally show more resistance to change and slightly more adaptivity, taking more excessive risks.

In contrast, hired CEO’s are normally chosen for their managerial expertise but are more likely to prioritise short-term gains over long-term growth.

Ownership Stakes

Excessive pay relative to company size or performance could indicate poor governance and misaligned priorities.

Track Record

Look into the CEO & executive team’s background, previous successes and failures, providing an idea of their ability to navigate challenges.

Alignment with Shareholders

Strong alignment occurs when the firm’s leadership prioritises shareholder value through solid capital allocation and sustainable growth strategies. Red flags could include excessive stock dilution or prioritising short-term earnings over long-term stability.

SWOT and Conclusion

Now, based off of all the analysis that has been done on the stock, a solid evaluation for this should be a section for the company’s strengths, weaknesses, opportunities, and threats. This can include any relevant statistics, macroeconomic impacts, and other relevant information.

You can use this evaluation to conclude how much of the portfolio you would like to allocate to the firm and include this in a concise conclusion.

Final Remarks

A really good free platform that gives a detailed stock report, containing quite a few of the useful metrics that I mentioned is Simply Wall Street: Free Portfolio Tracker, Stock Insights and Community – Simply Wall St.

To find out the company’s motives and team, the best place to look is on the firm’s website itself.

MacroTrends (Macrotrends | The Long Term Perspective on Markets) is a great place to find statistics and graphs on the macroeconomic performance of relevant economies/markets.

And finally, for technical analysis and key statistics, any common platform like Yahoo Finance, Google Finance, or Tradingview can provide similar free resources for starting out.

I hope that this overview will help out your education in the world of finance and wish you the best of luck in conducting your first stock report! A template will be created and accessible to subscribers in the near future.