6-11 Resources
This chapter is one of the most important resources you will find when it comes down to actually researching stocks. Understanding how to conduct a basic read of financial statements and some of the key ratios we have covered is essential to comparing different companies in the same industry apples-to-apples.
Before we move on, a last word of warning – Fundamental Analysis is an excellent tool when comparing companies in the same industry, or even the same sector. However, the EPS and PE Ratio expectations are radically different between different sectors, and so this is not a “silver bullet” to compare every stock in the investing universe.
Glossary
Fundamental Analysis – the process of evaluating the worthiness of a stock by looking at its financial statements and projections for future growth.
SEC – the Securities and Exchange Commission, a regulatory body in the United States that enforces rules and reporting requirements for companies trading on stock exchanges.
10-K – An annual report filed by companies listed on US stock exchanges. The 10-K includes both financial statements (income statement, cash flow statement, and balance sheet), but also operation plans, future obligations, how much executives are paid, and much more information.
10-Q – This is a less-detailed report than the 10-K but is published quarterly – four times a year. This includes the quarterly financial statements.
Annual Report – A report a company sends directly to its shareholders. It typically has some of the information from the 10-K, but also includes “spin” and editorial flourish from the company’s executive team to try to present the information in a more positive light.
Income Statement – A financial statement that shows a company’s revenue and expenses over a set period of time, usually over a quarter or fiscal year. This statement focuses on revenues and expenses that are earned or incurred.
Bottom Line – the total net profit or loss reported on an income statement. This is usually the last line in the statement and is also called “Net Income”.
Revenue – The “Top Line” of an income statement that shows the revenue a company has earned from operating activities.
EBITDA – “Earnings before Interest, Taxes, Depreciation, and Amortization”. This is a line of the income statement that excludes all extraneous earnings and expenses and focuses purely on income earned through the regular course of business.
Cash Flow Statement – a financial statement showing the revenue and expenses over a period of time, typically a quarter or fiscal year. Cash flow statements show more details about when exactly cash goes in and out of the business to see how solvent the company is, instead of just total profit/loss that is covered in the income statement.
EPS – “Earnings per Share”. This is the net income of a company divided by the total number of shares outstanding. This allows an investor to compare how profitable a company is relative to its stock price.
PE Ratio – “Price to Earnings”. This is the stock’s price divided by its EPS. When comparing two companies in the same industry, the company with the higher PE ratio is generally considered to be more profitable at the present time (but this may change in the future).
ROE – “Return on Equity”. This is a measure of how much money is earned by a company, divided by the total amount invested. ROE is most likely to be used by investment banks before an IPO, less by individual investors buying and selling stock.
Earnings Estimate – A guess made by Wall Street analysts as to what the earnings for a company will look like before the official financial statements are released. This is used as guidance by many investors.
Consensus Estimate – The average earnings estimate from every analyst who issued an official opinion. This is the “best guess” of Wall Street as a whole but lacks the detailed analysis of a single estimate.
Earnings Surprise – When a company’s official financial statements have significantly different earnings than the Earnings Estimates made by analysts. Positive surprises (when they beat the earnings estimate by a lot) can cause the stock’s price to jump, while a negative surprise can cause it to rapidly fall.
Balance Sheet – Also called a “Statement of Net Position”, it shows a company’s current total assets against liabilities, showing the final “net value”.
Shareholder’s Equity – A company’s total assets minus its total liabilities. This is calculated using the Fundamental Accounting Equation.
Bankruptcy – When a company is unable to meet its financial obligations and is forced to dissolve, with all assets sold off to satisfy as many of the liabilities as possible.
Leadership – The ability for a company’s management team to push the company forward and inspire its workforce.
Directorship – The management skill of the company’s executive team to build a qualified workforce and appropriately delegate operations to build a well-functioning organization.
Process Innovation – An improvement in how a company operates, usually by making it require fewer inputs (like raw materials or labor) to produce their output.
Product Innovation – An improvement in the quality of the output of a company.
Competition – Other companies operating in the same industry as another company, who directly compete for customers and business.
Resources
At the top of the page, you can find our “Research” tools. This tool includes not just quote information, but also the SEC filings (including the 10-K and 10-Q reports) all financial statements, and even more accounting ratios for every company listed in the United States.
This should be the first place you look when conducting your investing research. When you have your own brokerage account and are investing on your own, you can continue using our tools, but most brokerages offer their own suite with similar resources.
Exercise
You should have already begun to construct a portfolio in the last two chapters. Take a look at one of the stocks you are holding, and use a stock screener to find another company in the same industry.
Compare the cash flow statements and PE ratios of the two companies. Based on what you find here, decide if your original stock pick is the better deal, or if you might be better off selling some of your first pick and buying some of this newcomer.