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How to Analyze a Stock: Beginners Guide

  • Declan O’Flaherty

    Declan holds a Bachelor of Commerce from the University of Alberta and has over 4 years of experience investing in financial markets. As a fundamental investor, Declan embraces the investment principles of Warren Buffett and his disciples. This puts a focus on finding businesses with healthy financials, competent and accountable leader, enduring competitive advantages, and those that are selling at discount to what they are worth.

    View all posts

So you want to learn how to analyze, but aren’t sure where to begin?

Well, individual stock investing can be challenging, but if you have a sound strategy that focuses solely on finding the best businesses, then you may end up generating superior returns compared to the stock market.

To be a successful individual stock picker, you will need to develop a set of skills that are suitable for managing and owning risky assets.

These include a stoic temperament, enduring patience, and an eye for profitable and highly productive businesses.

Fortunately, it may not be as difficult to develop these skills as you might think.

In this article, we will show you a step-by-step process for how to analyze a stock.

This guide will not only help you find better stocks to invest in, but it will also help protect you against uncertainty and falling victim to your emotional biases.

If you are someone looking to improve your skills as an individual stock investor then this step-by-step stock analysis guide is the perfect article for you.

What is Stock Analysis? 

Analyzing various charts on a paper

Stock analysis is the process of evaluating a business’s fundamental and financial characteristics.

Known as fundamental analysis, this includes reviewing a company’s financial statements (ie. income statement and balance sheet), business model competitive landscape, market conditions, as well as any other factors that may affect the business.

Ultimately, our goal as an investor is to understand a business as best as we can so that we do not make costly mistakes.

To do so effectively means that we must be willing to avoid investment opportunities outside of our circle of competence while focusing solely on stocks that present the best opportunity for long-term success relative to the current price.

When analyzing a company’s stock to determine whether it is a worthwhile investment or not, an investor should explore its financial reports to see how it performed in the past and whether it was capable of overcoming poor financial conditions, such as those during the 2008 financial crisis.

This not only makes the process of valuing a stock easier, but it also ensures a level of predictability, no matter what type of market environment it is facing.

Moreover, analyzing a stock that generates growth year-over-year, demonstrates that a business is fundamentally sound and its future prospects are favorable.

That being said, there are moments in history when a business is disrupted by a new and emerging technology that shifts the landscape forever.

In that case, we will also want to analyze certain qualitative characteristics so that we can better anticipate disruptions and threats that may affect the long-term success of an investment.

All-in-all, our objective as analysts should be to ensure that our money is protected.

Though we aim to generate more money than we put in, we should prioritize not losing money first since it is the best way to sustain wealth.

That way we can have confidence in our investments no matter the market conditions.

What is Technical Analysis?

Candle stick charting for technical analysis
Technical Indicators, CoinDesk

If you aren’t convinced that fundamental analysis is for you, another popular method for analyzing stocks is technical analysis.

Technical analysis is an investment strategy that utilizes historical price and volume data, as well as market indicators and stock chart patterns to identify trends in the market and forecast the future price movements of publicly traded companies.

As a technical analyst, you believe that financial markets are efficient and the current price of a security reflects all available information about that security.

Moreover, technical analysts argue that by analyzing patterns in price movement, you can make informed trading decisions based on those trends, without requiring additional information.

However, critics would challenge the notion that markets are efficient given that it is primarily humans making investment decisions and we are naturally emotional and irrational creatures.

For this reason, it is difficult to rely on a company’s stock price action alone when investing.

That being said, it doesn’t hurt to learn about both fundamental and technical analysis given that you may be able to integrate them in a way that enhances your strategy overall.

For example, you may analyze a publicly traded company using fundamental analysis to determine the financial strength of the business.

Then, you could use technical analysis to evaluate the stock’s price action and determine an optimal time to buy.

Regardless, it is worthwhile exploring both methods so that you can find a strategy for analyzing stocks that work best for you.

Why Analyze Stocks?

“I am a better investor because I am a businessman, and a better businessman because I am an investor.” – Warren Buffett

While our main reason for analyzing individual stocks is to ensure that we invest in assets that protect our downside risk and offer the best opportunities for future returns, it also generates many unforeseen benefits as well.

Think Like an Owner, Not a Trader

Warren Buffett
Warren Buffett, CNBC

First, and most importantly, analyzing stocks shifts an investor’s mindset from one of a trader or speculator to that of an owner or a business person.

Oftentimes, as investors, we get carried away with the day-to-day price fluctuations of our assets.

This causes us to react more emotionally thus clouding our judgment and leading to poorer investment decisions.

But, when we start to treat our assets like businesses that we fully own, we begin weighing our assets differently by prioritizing certain fundamental characteristics of the asset over stock charts and market price.

For one, if we imagine that we are the sole owner of the asset, and our livelihood depends on it, we will probably care less about the current stock price, or whether it has gone up in the past day, week, or month.

Instead, we will prioritize internal business metrics like a company’s earnings, whether it is increasing its market share, strengthening its competitive advantages, retaining new customers, or cutting costs by selling-off redundant assets.

That is because the stock price has a very meaningless effect on the performance of the business over the long run, whereas the day-to-day operations and long-term sustainability of the company are everything.

If you truly want to guarantee that you never lose money in the market, the first thing you should do is ensure that the companies you own are making money and more of it.

That way you can be confident that the businesses keep on producing, even if your shares fall 20 to 50%.

If anything, when your stocks fall that much, you should be excited since it is probably an indication that to buy more shares.

I mean, what’s better than buying more of a great company for cheap?!

New and Better Investment Opportunities

To build on this, analyzing stocks is also beneficial for finding new investment opportunities.

Since we are prioritizing internal metrics like organic growth over price performance, we begin opening our eyes to new stocks that may have otherwise been dismissed.

That is because, in many instances, the best investment opportunities come from stocks that are trending downwards and trading at a lower market value or price-to-earnings ratio (p/e ratio) than before.

This occurs when a company’s stock price tanks, like during a market crash, even though its internal business metrics are healthy and growing.

Fortunately, as savvy investors, we love this because it leads to more lucrative buying opportunities where we get to invest in a business at a fraction of the price.

Given that our goal is to protect our capital, what better way to achieve it than by buying great companies on the low when everyone else is fearful?

How to Analyze Stocks

Now that we discovered what it means to analyze stocks and why it is important, it is time to explain how we choose to analyze individual stocks and what it takes to invest.

To demonstrate this, we will provide an example of our investment process that includes filtering or screening through multiple stocks, then selecting the one that best meets our investment criteria.

After that, we will touch on a few of the considerations that we make when assessing the quality of the asset so that you can have a clear understanding of what you should be looking out for.

Keep in mind that the process of analyzing individual stocks is highly subjective given that each investor has their preferences.

Moreover, the example we use here is overly simplified as we only mention what we believe to be the most important considerations.

When conducting your own analysis, you should expect that it will take considerable time and effort as you will want to ensure that you understand the business well.

Given that you are putting your hard-earned money at risk when you invest, the best thing to do is to commit as much time as possible to understanding the asset so that you can make a sound decision no matter the circumstances.

With that being said, let’s dive into our example.

Step #1: Sorting Through Stocks

MacroTrends Stock Screener
MacroTrends Stock Screener

There are hundreds of thousands of stocks to choose from so how do you know which one is a good investment?

In fact, there are over 8,000 securities listed on US Stocks exchanges alone.

So, if you want to find a business that is worthy of your capital, then you will need to sort through all of these stocks quickly and effectively.

Personally, the best way to achieve this is by using a stock screener, like, that allows you to screen and analyze over six thousand of the most well-known companies.

To begin, we will want to select an industry or sector that we understand well.

In this case, we will choose the “Computer and Technology” sector for this example.

Then, we will introduce a few filters to help us narrow down our search and find stocks that best fit our criteria.

To hone in on the desired companies we will wet a maximum market cap of $50 billion, a maximum P/E ratio of 15, a maximum long-term debt-to-equity ratio Of 0.5, and a minimum Return on Equity of 20%.

By using these specific filters, we will find smaller companies that are financially healthy, possibly trading at discount to their market values.

After applying these filters, you will notice that our search went from over 6,000 stocks to just 21.

But our research doesn’t stop there.

Step #2: Picking a Stock

Now that we have filtered our search down to just 21 stocks, our next step is deciding which of them is most likely to be the best investment opportunity.

To do so, we will evaluate each stock separately and emphasize four financial metrics to see which of them historically has performed the best fundamentally.

In this example, we will prioritize revenues, net income, shareholder equity, and the free cash flow of the business.

Essentially, when analyzing each stock, you want to see that all of the metrics mentioned are trending upwards, with only a few dips along the way.

As a general rule of thumb, the more years a company can demonstrate consistent growth, the better.

So, once you have found a few companies that meet these criteria, you will need to compare them to the other stocks in the same industry, and eliminate any that appear weaker or less productive.

After that, you should have a business or two remaining that appear to achieve the desired performance you were searching for.

As for our example, we determined that Littelfuse (LFUS) fit our criteria best.

Step #3: Evaluate the Financial Statements

Littelfuse Financials
Littelfuse Financials

While we took a glance at Littelfuse’s financial statements earlier, it is a good idea to analyze the company’s financials further so that we truly know what we are working with.

During this phase of stock research, let’s calculate the company’s growth rate over the past couple of years so that we can better understand how it performed historically and where it could be headed in the future.

To calculate a company’s 5-year growth rate, we will use 6 years of historical data from the four financial metrics mentioned in Step 2.

Then, we will combine our four growth rates to determine an average growth rate for the company.

It is also worthwhile to evaluate the return on equity and profit margins of a business since they are a good indication of a company’s well-being and its ability to use its capital effectively.

Keep in mind that this is a simple example and that you may want to use more financial data when assessing your own companies.

Ideally, we would like to see the growth rate above 10% and improve over time, since it indicates that the company is performing well financially and increasing its ability to generate value for stakeholders.

In the case of Littelfuse, its average growth rate over the past five years was 17.27%.

Step #4: Understanding the Company 

Understanding the financial health of a company is important, but it isn’t everything.

Instead, we should use the financial data as a foundation for the rest of our analysis.

To truly understand a company, it requires you to dig into the qualitative aspects like a stock’s business model, management team, market conditions, and competitive advantages, as well.

Essentially, you want to see that the business model is sustainable, the leaders are loyal and accountable, the market conditions are ripe with opportunity, and the competitive advantages are resilient and sustainable.

To determine if this is true, a company’s annual and quarterly reports will be your most valuable tool since they come directly from the source.

In them, you will find valuable information covering all aspects of the business including its risks and opportunities, successes and failures, as well as any other materials that might strengthen your understanding of the asset.

When analyzing these aspects of Littelfuse, one will learn that the company is an industrial technology manufacturer of vital electrical components that are used in a variety of products including consumer electronics, automobiles, commercial vehicles, and industrial equipment.

With over 30 years of experience, Littelfuse has built a high-value product portfolio that has achieved above-market growth throughout its history and at each phase of the economic cycle.

Furthermore, due to the company’s global technical expertise, it has established deep customer and distributor relationships that now serve over 100,000 end consumers, and 17,000 global associates, across more than 15 years.

Where it may be lacking as an investment, though not a major concern, is in its management team.

According to Simply Wall St, Littelfuse’s management team owns less than 2% of the business.

While not necessarily a bad thing, typically, it is better for investors when a management team, or its founder, owns a large piece of the pie since it means that their wealth is tied to the success of the business.

This forces CEOs to act with a long-term mindset rather than attempting to manipulate earnings or pump up the stock.

In regards to Littelfuse, it appears that despite the low ownership stake, the management has taken appropriate measures to improve the value of the business under the guidance of its CEO of 6 years, David Heintzmann.

For this reason, there shouldn’t be anything to worry about, and you can have confidence in Littelfuse as seems to be a promising company worthy of exploring further.

Step #5: What is it Worth?

As a bonus, it is valuable to understand what a business is worth so that you can decide whether the stock is overvalued or undervalued.

Previously, we wrote an article explaining how to value growth stocks and other equities in great detail.

In it, we emphasize that it is valuable to determine the intrinsic value of a stock because it allows you to make better investment decisions by protecting your downside, while also maximizing your returns.

If you are curious about taking your investment analysis to the next level, then we highly recommend you read that article as well.

Tying it All Together: Which Analysis is Right For You?

Learning how to properly analyze individual stocks is an essential tool for every investor.

Whether it is fundamental or technical analysis being used, the key is to develop a strategy that aligns with your objectives, while also accounting for any uncertainty that the markets may bring.

Though we primarily focused on fundamental analysis in this article, as it is our area of expertise, you may feel that technical analysis better suits your needs and interests as an investor.

Regardless, it is always valuable to continue expanding your knowledge and understanding as an investor given that there are no limits to the amount of information you can learn about a company.

Heck, we barely even scratched the surface ourselves!

That being said, if you are going to analyze individual stocks, make sure that you focus solely on the opportunities that you understand best and seem obviously advantageous.

Ultimately, our goal is to never lose money and if you stick to what you know best, it is likely that you build a profitable portfolio for many years to come.

Want to invest in penny stocks but are unsure how to begin? Check out this video to learn how to get started.


We are not brokers, investment, or financial advisers; you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. The company provided information in this profile, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.
Copyright © 2023 Edge Investments, All rights reserved.

  • Declan O’Flaherty

    Declan holds a Bachelor of Commerce from the University of Alberta and has over 4 years of experience investing in financial markets. As a fundamental investor, Declan embraces the investment principles of Warren Buffett and his disciples. This puts a focus on finding businesses with healthy financials, competent and accountable leader, enduring competitive advantages, and those that are selling at discount to what they are worth.

    View all posts

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