How to Analyze a Company Before Buying Its Stock
If you want more freedom in life, you’re going to have to learn how to make your money work for you. The stock market is a tool for building wealth, but only if you understand how it works. In this guide, I’ll break down the fundamentals of how to research profitable companies and how they operate. Once you understand the metrics, you’ll start to enjoy it and more importantly, use it to buy back your time.
Jordan Wu
16 min read·Posted
Table of Contents
Why You Should Be Investing in the Stock Market
The stock market is a place where investors buy and sell ownership shares in publicly traded companies, known as stocks. It plays a vital role in the economy by helping businesses raise capital and giving investors a way to grow their wealth over time.
If you're serious about achieving financial freedom and using your money to make more money, you’ll eventually need to become either an investor or a business owner or both. I’ve come to understand that money, at its core, is a tool that motivates people to create and deliver value to the world.
How you provide that value can vary. You might invest in real estate, offering homes for people to live in. Or you might participate in the stock market, investing in companies that offer meaningful products or services. You could even build your own business and be the one delivering that value directly. In any case, being an investor or a business owner gives you more control over your time, as long as you focus on adding value.
The stock market is an incredible tool for investing in companies that are growing, innovating, and expanding. With thousands of stocks to choose from. The key is learning how to identify the right opportunities. From my experience, I’ve learned that being informed and emotionally disciplined is everything.
Getting too emotionally attached to money leads to poor decisions and more often than not, unnecessary stress. But when I take the time to do proper research and truly understand what I'm investing in. I’m no longer at the mercy of market swings or fear about losing money.
At the end of the day, money is just a resource. It exists to help us create value, support others, and live a life of purpose. No matter how much you accumulate, you can’t take it with you. What matters is freedom. The ability to live in the moment, without fear or worry. If you can learn the game enough to buy back your time and live freely. You'll be in the best position to reach your full potential. So make your money count by investing in assets.
How to Learn More About a Publicly Traded Company
To become a more informed investor, you need to understand what you're investing in. That means learning how a company operates and how it delivers value to the world. One of the best ways to gain this insight is by reviewing the official documents the company files with the U.S. Securities and Exchange Commission (SEC). These documents provide a detailed look into the company’s financial health, strategy, risks, and performance. All of which are crucial to making smart investment decisions.
You can access these filings through the SEC’s EDGAR database here: https://www.sec.gov/edgar/search/
10-K (Annual Report)
The 10-K is a comprehensive annual report that publicly traded companies are required to file with the U.S. Securities and Exchange Commission (SEC). It provides a detailed and audited overview of the company’s financial performance and operations for the entire fiscal year.
What’s inside a 10-K?
- Business Overview: Description of what the company does, its products or services, and its markets.
- Financial Statements: Audited income statement, balance sheet, cash flow statement, and notes.
- Management’s Discussion and Analysis (MD&A): Management’s insights on financial results, trends, and future outlook.
- Risk Factors: Detailed description of the risks that could affect the company’s business or stock price.
- Legal Proceedings: Information on any significant lawsuits or legal challenges.
- Executive Compensation: Details on how company leaders are paid.
- Corporate Governance: Information about the board of directors and company policies.
The 10-K offers a deep dive into the company’s health and strategy. Giving investors a solid foundation to assess whether to invest, hold, or sell. Because it’s audited and legally required, it’s one of the most reliable and detailed sources of information available.
10-Q (Quarterly Report)
The 10-Q is a quarterly report that publicly traded companies must file with the U.S. Securities and Exchange Commission (SEC). It provides a snapshot of the company’s financial performance and operations for the most recent quarter.
What’s inside a 10-Q?
- Unaudited Financial Statements: Income statement, balance sheet, and cash flow statement for the quarter.
- Management’s Discussion and Analysis (MD&A): Insights from management on the quarter’s results and any significant changes since the last report.
- Risk Updates: Any new or evolving risks affecting the company.
- Legal Proceedings: Updates on ongoing or new legal issues.
- Other Relevant Information: Sometimes includes details on recent transactions, acquisitions, or other material events.
The 10-Q helps investors track the company’s performance between annual reports, identify trends, and stay informed about any new developments. Because it’s filed quarterly, it offers more timely insights but is unaudited. So it’s generally considered less comprehensive than the annual 10-K.
8-K (Current Report)
An 8-K is a report that publicly traded companies must file with the U.S. Securities and Exchange Commission (SEC) whenever a major event occurs that shareholders should know about. Unlike the 10-K or 10-Q, which are scheduled reports, the 8-K is filed as needed to disclose important developments in real time.
What kinds of events trigger an 8-K filing?
- Significant changes in leadership (e.g., CEO or CFO resignations or appointments)
- Mergers, acquisitions, or asset sales
- Bankruptcy or financial distress
- Changes in control of the company
- Major contracts or agreements
- Release of earnings results (sometimes)
- Legal proceedings or regulatory actions
- Any other material event that could impact the company’s financial health or stock price
The 8-K keeps investors informed of sudden or unexpected events that could affect the company’s value or outlook. Because these filings happen as events unfold, they provide real-time transparency, helping investors make timely decisions.
Proxy Statement (DEF 14A)
The Proxy Statement, filed as DEF 14A with the U.S. Securities and Exchange Commission (SEC) is a document companies send to shareholders before their annual meeting (or special meetings). It provides important information shareholders need to vote on key company matters, often without attending the meeting in person.
What’s inside a Proxy Statement?
- Board of Directors: Information about the nominees up for election or re-election.
- Executive Compensation: Detailed disclosure of how much and how company executives are paid, including salaries, bonuses, stock options, and perks.
- Shareholder Proposals: Any proposals from shareholders that require a vote.
- Voting Procedures: How shareholders can vote (by proxy, in person, electronically).
- Corporate Governance: Information about board committees, policies, and practices.
- Other Important Matters: Such as approval of auditor appointments or mergers.
The proxy statement helps shareholders understand how the company is governed, the alignment of management incentives with shareholder interests, and key issues that require shareholder approval. It’s a crucial document for investors who want to engage with corporate governance and make informed voting decisions.
Form 4 (Insider Transactions)
Form 4 is a document that insiders of a publicly traded company, such as executives, directors, and large shareholders. They must file with the U.S. Securities and Exchange Commission (SEC) whenever they buy or sell shares of their company.
What’s inside Form 4?
- Details of the transaction, including:
- Date of the transaction
- Number of shares bought or sold
- Price per share
- Nature of the transaction (e.g., purchase, sale, gift, exercise of stock options)
- Insider’s name and role in the company
- How many shares the insider still owns after the transaction
Form 4 filings offer transparency into insider trading activity, which can provide clues about how confident company insiders feel about the company’s future. Insider buying can signal confidence that the stock is undervalued or that good things are coming. Insider selling might be routine or raise questions depending on context (e.g., diversification, tax needs, or concerns). Since insiders have deep knowledge of the company, their transactions are closely watched by investors.
Understanding Financials
Financials refer to a company’s financial statements and related data that reveal its economic health and performance. Important documents like the income statement, balance sheet, and cash flow statement provide valuable insights into how the company operates. Understanding these fundamentals is crucial because a profitable company creates value and rewards its investors, while an unprofitable company can lead to losses for investors.
Income Statements
An income statement, sometimes called a profit and loss statement. Shows a company’s revenues, expenses, and profits over a specific period (usually a quarter or a year). It’s a key financial document that helps investors understand how well the company is generating profit from its operations.
Key Income Statement Metrics for Investors
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- Shows the total income generated from business operations. It’s the starting point for understanding the company’s size and market demand.
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- Direct costs tied to producing goods or services. Critical to evaluate how efficiently a company manages production costs.
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- Revenue minus COGS. Indicates how much money remains after covering production costs, showing basic profitability before other expenses.
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- Costs of running the business beyond production, including selling, general & administrative expenses and research & development. Important for understanding overhead and investment in growth.
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Earnings Before Interest and Taxes (EBIT)
- Profit from core operations before interest and taxes. Shows how well the business performs from its primary activities.
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Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
- Measures operational profitability by excluding non-cash expenses like depreciation and amortization. Useful for comparing companies with different capital structures.
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- The “bottom line” profit after all expenses, taxes, and interest. This figure shows the company’s overall profitability.
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Earnings Per Share (EPS), Basic
- Shows profit attributable to each share of stock. Essential for assessing shareholder value and comparing companies.
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- Cost of debt financing. Important to understand how much the company spends on servicing its debt.
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- Helps understand the company’s tax obligations and tax strategies.
You can use platforms like TradingView to easily access and review a company’s income statements. For example, here’s NVIDIA’s (NVDA) income statement on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-income-statement/
Balance Sheet
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the shareholders’ equity (the residual value belonging to shareholders after debts are paid). This helps investors understand a company’s financial stability, liquidity, and capital structure. It shows whether the company has enough assets to cover its debts and how much value is left for shareholders. This insight is critical when evaluating risk and long-term viability.
Key Balance Sheet Metrics for Investors
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- Indicates the company’s liquidity and ability to cover short-term obligations without raising debt.
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- Shows all assets that can be converted to cash within a year (important for short-term financial health).
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- Represents debts and obligations due within one year, critical for assessing liquidity risk.
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- Reflects the company’s overall leverage and financial risk.
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- Gives a clearer picture of actual debt burden after accounting for cash reserves.
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- Shows the residual value that belongs to shareholders after all liabilities are paid.
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- Profits reinvested into the company, signaling how much value is kept for growth rather than paid out as dividends.
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- Money owed to the company by customers (important for understanding cash flow and operational efficiency).
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Goodwill and Intangible Assets
- Reflects the value of acquisitions and non-physical assets, which can impact long-term valuation.
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- Represents the company’s net asset value on a per-share basis; useful for assessing stock valuation relative to company assets.
You can use platforms like TradingView to easily access and review a company’s balance sheet. For example, here’s NVIDIA’s (NVDA) balance sheet on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-balance-sheet/
Cash Flow
Cash flow refers to the movement of money into and out of a business during a specific period. It shows how much actual cash a company generates from its operations, invests in growth, and uses to pay debts or return to shareholders. Unlike profits shown on an income statement, cash flow shows the actual liquidity available to keep the business running and growing. Positive cash flow means the company can cover its expenses, invest in opportunities, and reward shareholders, while negative cash flow might indicate financial trouble.
Key Cash Flow Metrics for Investors
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Cash From Operating Activities
- Cash generated by the company’s core business operations. It shows whether the company’s regular activities generate enough cash to sustain and grow the business.
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- Operating cash flow minus capital expenditures (money spent on fixed assets). It indicates how much cash is available after maintaining or expanding the asset base, which can be used for dividends, debt repayment, or growth.
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- Cash spent on purchasing or upgrading physical assets like buildings, equipment, or technology. Important to assess investment in future growth.
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Cash From Investing Activities
- Cash spent on or received from buying and selling long-term assets or investments. Shows how the company is investing in its future or divesting assets.
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Cash From Financing Activities
- Cash received from or paid to shareholders and creditors, including issuing or repurchasing stock, borrowing, or repaying debt. Reflects how the company funds its operations and returns capital to investors.
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Depreciation & Amortization (Cash Flow)
- Accounting expenses that reduce reported earnings but do not affect cash flow. Important to add back when analyzing cash flow because they are non-cash charges.
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- The net change in current assets and liabilities (like accounts receivable, accounts payable, and inventory). This impacts cash available for operations and can signal operational efficiency.
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- Cash returned to shareholders in the form of dividends, showing how much income the company distributes.
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Issuance (Retirement) of Debt, Net
- Cash raised from or used to pay off debt. Important for understanding how the company manages leverage and finances growth or obligations.
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Issuance (Retirement) of Stock, Net
- Cash received from issuing shares or spent buying back stock. Reflects capital raising or returning money to shareholders.
You can use platforms like TradingView to easily access and review a company’s cash flow. For example, here’s NVIDIA’s (NVDA) cash flow on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-cash-flow/
Statistics
Company statistics are key numerical data points and financial ratios that provide insights into a publicly traded company’s performance, valuation, and financial health. These statistics help investors quickly evaluate and compare companies before making investment decisions. They provide a snapshot of how the company is valued, how risky the investment might be, and how the company is performing financially and operationally. Investors use these stats to screen stocks, assess value, and build diversified portfolios.
Key Statistics Metrics for Investors
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- Shows the company’s overall size and market value, helping investors understand its scale and risk profile.
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- Measures how much investors are willing to pay for each dollar of earnings, indicating if a stock is overvalued or undervalued.
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- Reflects how effectively a company uses shareholders’ money to generate profits, showing management’s efficiency.
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- Indicates the company’s financial leverage and risk by comparing debt levels to shareholders’ equity.
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- Assesses short-term liquidity by comparing assets that can be quickly converted to cash against short-term liabilities.
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- Reveals how much profit a company makes from its core business after covering operating expenses, indicating operational efficiency.
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- Demonstrates the company’s ability to increase profitability over time, signaling potential for stock price appreciation.
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- Indicates the income return on investment through dividends, important for income-focused investors.
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- Measures a stock’s price volatility relative to the overall market, helping assess risk and portfolio diversification needs.
You can use platforms like TradingView to easily access and review a company’s statistics. For example, here’s NVIDIA’s (NVDA) statistics on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-statistics-and-ratios/
Dividends, Earnings, and Revenue
Dividends are payments made by a company to its shareholders, usually from its profits. They’re a way for companies to share earnings directly with the people who own their stock.
You can use platforms like TradingView to easily access and review a company’s dividends. For example, here’s NVIDIA’s (NVDA) dividends on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-dividends/
Earnings represent the profit a company makes after covering all its expenses, including operating costs, taxes, and interest. They’re often referred to as the "bottom line" because they appear at the bottom of the income statement.
You can use platforms like TradingView to easily access and review a company’s earnings. For example, here’s NVIDIA’s (NVDA) earnings on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-earnings/
Revenue is the total amount of money a company earns from its business activities—typically from selling products or services—before any costs or expenses are subtracted. It’s often called the "top line" because it appears at the top of the income statement.
You can use platforms like TradingView to easily access and review a company’s revenue. For example, here’s NVIDIA’s (NVDA) revenue on TradingView: https://www.tradingview.com/symbols/NASDAQ-NVDA/financials-revenue/
Developing a Strategy That Works For You
You want to develop a strategy that works for you based on your personal goals. Consider what level of risk you’re comfortable taking. Are you aiming for short-term gains that require active trading, or do you prefer long-term growth with a more passive approach? Your strategy should align not only with your financial goals but also with who you are as a person. By understanding both, you can create a plan that fits your lifestyle and helps you stay consistent over time.
Key metrics can be totally different depending on the industry. Choose a sector you're comfortable with and get to know the key metrics that drive its success. This guide to sectors and industries can help you out.
Summary
Picking profitable stocks is all about understanding company fundamentals and staying informed through public filings. You don’t need to pick dozens of winners, just a few solid investments can set you up for long-term success and wealth building.
If you're holding onto losing stocks, don't be afraid to cut your losses. Recovering from a bad position takes time, and it's often wiser to move on than to stay hopeful when the company's fundamentals are deteriorating.
For those who are just getting started, I highly recommend practicing through paper trading. Learn the game before putting real money on the line, because once you do, you’ll realize the market is a powerful tool to help you buy back your time and live life on your own terms.
