The Short Version
When a professional stock analyst evaluates a company, they generally look at a consistent checklist: is the company profitable and growing? Is it priced reasonably compared to its earnings and peers? Does it carry too much debt? Is management allocating capital well (paying dividends, buying back shares, or reinvesting wisely)? And how does the stock compare to its industry and the broader market? Every ratio and formula later in this guide exists to answer one of these underlying questions.
Explain It Like I'm 10
Imagine you're about to trade one of your toys to a friend for one of theirs. Before you agree, you probably ask a few questions in your head: Is their toy actually in good shape? Is it worth what they say? Do they take care of their stuff? Professional stock analysts ask the exact same kinds of questions about a company before recommending it — just with bigger numbers and fancier names.
Step-by-Step Example
- 1 Growing? Check if the company sold more stuff and made more profit this year than last year.
- 2 Fair price? Compare the stock's price to how much money the company actually earns (this is the P/E ratio, explained later).
- 3 Too much debt? Check how much the company owes versus how much it owns.
- 4 Good decision-makers? See if the company's leaders are spending money wisely — building the business, not wasting it.
- 5 Compares well? Look at similar companies in the same industry to see if this one stands out, for better or worse.
Quick Recap
- ✓ Growth: is revenue and profit increasing year over year?
- ✓ Valuation: is the current price reasonable relative to earnings, assets, or cash flow?
- ✓ Financial health: does the company have manageable debt and strong cash flow?
- ✓ Management & capital allocation: dividends, buybacks, and reinvestment decisions.
- ✓ Relative comparison: how the stock stacks up against competitors and the overall market.