What’s the best way to analyze a company?
If you answered with numbers, then you are right. Numbers don’t lie. Numbers allow you to compare one company to another. Numbers are measurable, and definitive.
This kind of analysis doesn’t depend on how I’m feeling today. It’s not subjunctive, and for the most part isn’t influenced by our own biases.
Don’t get me wrong you can talk to people as part of your analysis. But it should never make up a majority of your decision. Not only do biases heavily affect this, but also the vast differences in world view.
Analyze a Company w/ Interviews?
Let’s say you interview an employee of a company you want to invest in. His worldview is going to be different than most everybody else at the same company. Maybe his boss is a jerk, but the company is very well run. Maybe he just got a raise or promotion and thinks highly of the company right now, more than normal.
Maybe a company appears to have everything together, yet behind the scenes they are over-leveraging themselves. Maybe a company is super profitable, but too overvalued on Wall Street. These 2 conditions happen all too often.
It’s for all these reasons and more that you want to use numbers to analyze a company. To do this you have to examine the financials.
Every year every company is required to file an annual report with the SEC. Also called the 10-k, this document is often 100 pages or more. In the document are important numbers that every company is required to file.
Forget all the other numbers. Focus on the required numbers. Consolidated statements of income, consolidated balance sheet, and consolidated statements of cash flows. All companies must audit and submit these numbers. Use them to compare companies and determine which are the best investments.
In this video I walk through how I use these numbers. In the spreadsheet you’ll see the important ratios to consider, and they are automatically calculated as I enter in the financial values.
The values I pull are the following:
Earnings per Share (EPS)
Those values are used to calculate these ratios:
Price to Sales (P/S)
Price to Earnings (P/E)
Price to Book (P/B)
Price to Cash (P/C)
Debt to Equity
Which are then used to compare and analyze companies.
Please note: The spreadsheet is no longer available for a free subscription. Interested viewers can visit http://valuetrapindicator.com and purchase the spreadsheet package there.
If any of these terms are foreign to you, I’ve made an Investing Glossary just for you.
**All Rights Reserved. Investing for Beginners 2013**
**Video Tutorial: How to Properly Analyze a Company**
**Youtube Video taken from the eInvesting4Beginners channel**