Stock research: what am I looking for?

The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.

This series is all about solving those moments that could, and often do, paralyse us at points along our investment journeys. Nothing stops us in our tracks quite like being confronted with a seemingly endless universe of stocks and knowing we need to pick some to invest in. If you’re at a loss when it comes to whittling down that pile of shares into one curated portfolio, this one’s for you.

“Know what you own and know why you own it” is the classic guidance from investment legend, Peter Lynch. It’s as beautiful as it is simple and, as obvious as you might think it is, it’s amazing how many investors don’t do their homework.

That’s not a criticism though. If you’ve ever had a look at a company’s accounts, it’s natural to feel like you’re out of your depth but it doesn’t have to be that complicated. You don’t need a PhD in corporate finance to get going despite what all the accountant speak might have you believe. In fact, you can start off by simply asking whether the company’s actually making any money or not.

Read more

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Five lessons from Warren Buffett

How to value a stock (without losing your mind)

Once you get familiar with what to look for (which we will get onto) you’ll start to get an idea of the company underneath the line chart; its strengths, weaknesses, how growth looks over months, quarters and years, and if you think management is using money well or not.

That helps give context to stock chart movements - are they reasonable and reflective of what’s happening under the bonnet or are they painting a story of undervaluation or overexcitement?

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Are you a contrarian investor?

Why valuations matter, even in tech

Do I need to get every stock pick right?

Matching the accounts to the market’s view can help you see if it’s a stock that could fit your strategy or not, and what sort of price you deem reasonable to buy in at.

In the end, it’s about making sure you’re as informed as possible when it comes to the business itself and the price it’s trading at, which should hopefully make for a more confident investor.

There are thousands of listed companies out there, so where should you start looking? Warren Buffett’s advice was to roll your sleeves up and crack open the book at the letter ‘A’...

If you know what you’re looking for in terms of positive qualities and red flags, it’s not a bad idea - it certainly highlights the fact that there are no shortcuts when it comes to stock research. You tend to get out what you put in.

For more of an on-the-job-learning approach, think about starting with a company you’re familiar with. It could be a company you use, know or have worked for, or a company whose model you already understand, like a coffee chain. The aim here is to remove at least one element of mystery and help give context to the accounts before you even start. You might find it’s not your thing in the end but if you see comments about ‘lower footfall’ and you’ve recently chosen to skip your morning latte you’ll be able to connect the dots.

Another tip, when you’re in learning mode, is to have a look at larger companies. There tends to be more analyst research out there on the big names and they release updates more often than small companies on exchanges where reporting requirements are more relaxed.

One thing to always steer clear of is shouty ‘buy buy buy’ recommendations on online fora, WhatsApp groups or anywhere that’s really pushing you to trade. You should never feel forced to buy or get to know a stock. Research here is likely to be patchy and could well be manipulated - get to know the telltale signs of pump and dump schemes and avoid them like the plague.

You might already have a high-level understanding of how a company works but digging into how it makes its money is still crucial. It might even throw up some surprises. For example, we all know Amazon for those brown packages clogging up the doorway but did you know its web services division raked in over $100bn in 2024? [1] The more you know, the more confident you’ll feel about your decision - even if that’s to pass up on this stock and move on.

A few starter questions might be:

• What does this company do?
• Where’s the main profit centre?
• Oh yea, is it profitable?
• Is there a lot of debt? Is it manageable?
• How has growth been over the past five years?
• How does the company see its own future?
• Who are its competitors?

There will always be more questions but your ultimate aim is to piece together a jigsaw of the pros and cons here - is this a sustainable business that won’t be eaten by the competition?

The jargon comes thick and fast when you click into the latest reports and accounts but if you can translate it into ‘normal’ it’s really not so bad. Jargon-busting vocab lesson one:

Revenue (sales): is this growing year on year? Net income (profit): once the costs of running the business are taken care of, is it making money? Debt: how does this stack up against the money coming in? Ideally debt is low but if it isn’t, is management doing something about it? Operating margin: for every pound/dollar of sales, how much lands as profit? Is this consistent, resilient and impressive against the competition?

Each company will report slightly differently, with their own measures and lingo but your goal is always the same - distill it all into a vision of how the company has been progressing and the plans to grow from here.

It’s useful to think about buying a stock like you’re buying the business because, well, you are. You’re becoming a part owner and, for prospective business owners, due diligence is key especially when it throws up red flags. Here are some things to watch out for:

• Declining sales/profits. Is this a sign of a dying industry, some sort of global phenomenon or is management asleep at the wheel?
• High debt levels. Paying interest on debt is annoying at low levels and crippling at high levels. Why has debt got so bad and is there a clear plan to get rid of it?
• Legal battles. Is the firm tangled up in court cases that will take time, energy, money and possibly a brand refresh to resolve? Is there a clue as to the corporate culture in there?
• Too much hype. It might not even be the company’s fault but is the perception of the company very different from the reality? Sometimes share prices reflect investors’ emotions rather than the facts.

That last point is an important one. It’s normal to get distracted by the share price charts but, as investors, what we actually want to know is how much of a firm’s future performance is reflected in that price. It’s the equivalent of a dealership offering a price for a car. We need to know how well it runs and, realistically, how it’s going to be driving in a few years before we can decide for ourselves how well that price reflects the value on offer today.

Valuations can give you an idea of this. For example, the price-to-earnings (P/E) ratio compares the share price that buyers and sellers are currently trading around, to the last reported earnings (net income, or profit). It’s a good way to put all the companies in a sector on a level playing field.

Take the share price and divide it by the company’s earnings per share (EPS) which you’ll likely find in the latest accounts.

P/E ratio = share price / earnings per share (EPS)

Example:

If a stock trades at $100 and its earnings (net income/profit) are $5 per share, the P/E ratio is:

100 / 5 = 20

This means buyers of the stock would be willing to pay $20 for every $1 of profit the company earns.

That doesn’t tell you the whole story though. The P/E ratio is most useful when you compare it to other companies in the same sector, to see which ones look potentially overvalued (or carry expectations of very high growth) or undervalued (or with prospects the market thinks are poor).

Some sectors, like oil and gas, naturally carry lower P/Es and the likes of tech often run hotter - so comparison between the two doesn’t give a whole lot of insight. Keep your ratios relevant and maybe explore some of the others below that work in similar ways.

This isn’t an exhaustive list - you might add more valuation methods if you are particularly interested in unloved stocks or stocks with high growth potential - but this will get you started on the path. Ultimately, you want a well-rounded view of the company, where it’s headed and how the current price reflects that.

As investors, we’re all trying to build up a view of just how investible a company is - it’s why we look at it from all angles, trying to find plus points and possible snags. If it feels like a huge undertaking, take a step back and separate it into chunks. Maybe this week is for looking into how the product range has changed over time, or how profits have changed over the past few years and why. Next week can be all about competitors. Just don’t rush it - that’s how we start to cut corners or skip the parts we know might take a bit longer. Take your time and maybe keep track of how the accounts change over a few quarters - some of the best investors out there will do this and change their models as the company changes too.

Source: [1] Statista, May 2025

Important information

When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.