How to Analyze a Company

Analyzing a company is necessary to determine whether that company is worth investing in. While you can guess the value of the company, you can also use some tested investment principles for determining whether a company is a good buy. These investment principles are called "fundamental analysis" and are composed of various indicators that predict whether a company will produce positive investment returns over the long term. One of the best ways to analyze a company is by calculating its price-to-earnings ratio or "P/E ratio."

Things You'll Need

• Financial calculator

Instructions

1. Get the company's financial statements for the last four quarters. This information is normally freely available from the company you're analyzing.

2. Look at the current stock price of the company. This information is available in the newspaper in the financial section or online using an online stock quoting search engine.

3. Divide the market value per share of the company you're analyzing by the earnings per share (EPS). Earnings per share is found by looking at the company's total earnings for the year on the financial statement.

4. Compare the stock price to the P/E ratio. Then compare that company to other companies in the same industry. The lower the P/E ratio relative to its stock price, the better, all other things being equal. A low P/E ratio suggests that the company is "cheap" compared to its stock price. Comparing a company's P/E ratio to other companies in the same industry allows you to get an idea of what other companies' P/E ratios are, and thus gives you a better idea of the true value of the company you're analyzing.

References

• "The Intelligent Investor, Revised Edition"; Benjamin Graham; 2003
• "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007