How to research stocks like a pro using quantitative analysisHey zxcv, it’s Mark. Whenever I’m deciding whether to buy a stock, I start by looking at its numbers. That process is called quantitative analysis. You might think it’s full of complicated-sounding finance terms that only analysts in suits understand. But with a bit of practice, anyone can do it. So here are the 3 questions and indicators you should check when researching a stock: Indicator 1: The income statement The income statement answers the first question: is this business making a healthy profit? Think of it like selling bananas at a market. Everything your customers pay you is your total revenue. What’s left after you’ve paid for the bananas, plus running costs like advertising and wages, is your operating income. Here’s a simple calculation to work it out: Operating income ÷ total revenue × 100 So if your stall takes $1,000 and you’re left with $100, that’s $100 ÷ $1,000 × 100 = 10%. A great rule of thumb is that 5% is a low profit margin, 10% is healthy, and 20% is high. But remember, older, more established companies tend to be more profitable than newer, faster-growing ones. Amazon took years to make a profit, and look at them now. Indicator 2: The balance sheet The balance sheet answers the second question: does this company own more than it owes? It’s called a balance sheet for a reason, so picture a seesaw. Now picture your banana stall again. On one side goes everything you own, like the cash, the bananas and the van. Those are your assets. On the other side goes everything you owe, like the loan on that van. Those are your liabilities. You generally want the companies you invest in to have assets that outweigh their liabilities. The gap between the two is the total equity, which is the value left for shareholders once all the liabilities are paid off. Total equity = total assets - total liabilities So if your stall owns $5,000 and owes $2,000, its total equity is $3,000. For us investors, a higher total equity is generally a green flag. Also look out for current assets, which can be turned into cash within 12 months. A company with plenty of them has money it could access in a financial emergency. Indicator 3: The cash flow statement The cash flow statement answers the third question: is more cash coming in than going out? Cash comes in when you sell bananas and goes out when you pay your bills. If more goes out than comes in, that could really hold you back. The statement splits that cash into three sections:
The one that catches people out is investing, because that figure is often negative. I know what you’re thinking… red flags all around! But for a real company, it’s usually new factories and technology, which can create long-term value. Finally, look at the change in cash at the bottom. If the company ended the year with more cash in the till than it started with, that’s generally a good sign. I know that was a lot to take in, so save this email and come back to it whenever you’re researching your next stock. The next step is putting your research into action. Trading 212 lets you start investing from as little as £1, and I’ve managed to get my readers a free fractional share worth up to £100 when they sign up using the promo code TILBURY or my link. Get your free fractional share here → https://www.trading212.com/join/TILBURY This is an affiliate link. I get a little kickback with every sign up, which goes straight back into funding this newsletter and my free YouTube content. Thanks! Terms and eligibility apply. Capital at risk. zxcv, let’s finish with a quick quiz. Which calculation tells you if a business is making a healthy profit? Hit reply to this email with your answer. All the best, Mark Tilbury |