Investing 301

Evaluating an investment takes time and patience. Here's how to find out what you're buyingbefore you commit.

a successful strategy, such as purchasing companies with accelerating growth and low P/Es (price to earnings ratio), that strategy can easily be exported to other industries.” See for company and industry profiles.

Reviewing the financials of a company will provide performance evaluations. Always compare them over a few years or a few quarters. Try Standard & Poor’s stock reports ( Here are some key terms:

Balance Sheet. Assets = Liabilities + Shareholder’s Equity is the formula that explains the setup of this document. A key is “to make sure that the total debt is not rising as a percent of total assets,” says Cassidy. For example, “Look at receivables and inventory to make sure they are not growing as a percentage of total sales, which would mean customers are not paying their bills, and maybe that some inventory is outdated, like with Lucent Technologies (NYSE: LU).” You can order a free annual report from a company’s investor relations department, or go to

Income Statement. This information tells you how much money the company is making. “Look for the cost of goods sold as a percent of sales: You don’t want it to be rising,” says Cassidy. A lower ratio means the company earns more on each sale. “Also, look at the R&D (research and development) expense as a percent of sales and hope it is not dropping; that would mean the company is saving resources at present, but may not have enough sharp new products in a year or two.” Look at the company’s 10-K (annual financials) or 10-Q (for the most recent quarter) statements for financial details.

Earnings Growth. This figure is the net i
ncome growth of the company; the higher it is, the better off a shareholder is. Brunner suggests that you look at a company’s sales growth, as well as its operating expenses: Are rates increasing or decreasing? Are costs rising or falling? You want to choose companies that have a long-term record of earnings growth, or products that are in markets that hold future growth. Also, get hold of reports from reputable analysts to compare their estimates. But watch out, says Cassidy: “Hold is a code word for sell.”

These basics will get you underway in stock evaluation. Check out the charts for your prospects on to see how they’ve progressed over time. Stock analysis can be a pretty demanding process, but now that you know where to start, you can take your intuition along with the key clues you uncover, and design a portfolio that you can be thankful for.

24 Essential Lessons for Investment Success: Learn the Most Important Investment Techniques from the Founder of Investor’s Business Daily by William J. O’Neil (McGraw-Hill Professional Publishing, $10.95)

Mastering Fundamental Analysis by Michael C. Thomsett (Dearborn Trade, $26.95)

Select Winning Stocks Using Financial Statements by Richard B. Loth (Dearborn Trade, $19.95)


Investment Alliance, 707-571-2311
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