There are 3 important statements to carefully look into when you analyse a company. They are: the balance sheet (BS), income statement (IS) and the cash flow statement (CF)
The BS shows on a certain date what the company has and what it owes others.
The IS shows the sources the profits come in.
The CF statement shows how cash flow in and out of the company.
When I study the balance, the first thing I look at are the current assets and the current liabilities. From this I work out the current ratio. If the current ratio is below 1, I take this as a red flag, and I shall not bother to dig deeper into the stock. This is my personal style; it is not a standard criteria for you to follow.
Cash is a very important item.The more the better. If a company has plenty of cash, it can do many things. It can expand its business, use it to acquire new businesses, purchase its own shares or distribute some of it to its shareholders.
Debt is the opposite. A high debt, especially one with high interest rate, relative to its paid-up capital is a red flag. Bear in mind that debt has to be serviced. This means interest has to be paid. A company that has a not of cash and much borrowings is not in a strong financial position.
Personally, I prefer small-cap stocks and mid-cap stocks instead of big-cap stocks. Big-cap stocks are suitable for institutions and fund managers. As a small player, you can’t compete with them. Once institution or fund managers have taken notice of a stock, the stock will no longer be cheap.
There are many other things to consider when you look at the BS. For example, when you look at the accounts receivable or inventory, you need to concern yourself whether these can be easily turned into cash.
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