5. Valuation Methods
5.4 Combining the Story
You have analyzed 3 of the statements by following the processes that I have laid out for you earlier. Now, it is time to combine all these inputs together to firm up whether the particular stock you have chosen is a good buy or not. To not lose sight of the big picture, let us relook again at the analysis process and use it to combine the story:
At this stage of the analysis, you have already identified a stock of interest through the various resources. By reading the annual, you have gotten a sense of the performances in the previous year and the key strategies that management intends to pursue in the short and long run. After reading these excerpts, see if the strategy and what management communicates to the shareholders portray a good picture for the future. Next we relook back at the analysis you have done for the 3 financial statements. We can group the different analysis in the statements into a few categories; Profitability, Financial Strength and Valuation. You can use the following table to combine all the analysis that you have done:
Input all the analysis that you have done into this "checklist" and use this to decide whether all the categories exhibit a positive indication for the company. One thing to note is that NOT all the factors have to be checked "Yes" for the stock to be a good buy. However, each category should be geared towards a positive signal for the company. If there are any analyst reports on the company, be sure to read them as well to see if you have missed out any perspective which could be vital to the company's performances. Lastly, if the analysis of the annual report shows a positive indication, go one step further and conduct the same analysis for the most updated quarterly unaudited reports of the company as a double check to make sure nothing drastic has changed over the course of the current year. Do a few analyses based on this guide and you will get better and faster in analysing stocks. It may be difficult for you to find such stocks in the market, especially for stocks that you have taken a liking due to various reasons. However, be disciplined and make sure that all these bases are covered when you ultimately make a decision whether to buy a particular stock. Again, the going may be tough and the rewards more than make up for it.
The next chapter: When to Sell, looks at when should you sell stocks in your portfolio.
Follow my analysis of stocks in the market. This includes my personal
opinion of stocks which are either already in my portfolio or those which
are currently in my watchlists.