What should I research about a company in order to decide whether or not to buy their stocks?

Hi,

Actually it depends on the type of investment strategy you use. Be it dividend investing or value-growth or growth investing.

But in general, we look at
1) Business Model (if it has any moat etc)
2) Financials
3) Management Team
4) Growth Story/Prospects
5) Risks involved (gets you the other picture)

Each point above will expand to another whole new segment to look at and would require a lot more effort to drill into them...

But hope it can gives you a quick overview on what to look at. I recommend using Yahoo Finance or Morningstar as a tool for this.

Cheers
James
Smallcapasia

I used to work as an equity analyst back in the day, and as such am putting across what I look for from a Fundamentals Analysis perspective.

The most basic starting point is to know what the business does. You can best understand this by looking at the reported revenue segments. Case in point: MEITU - you would know them for their photo editing apps, and one would guess that their revenue mostly comes from that, but if you look into their IPO prospectus - most of their revenues come from hardware ie. Smartphones that are built for helping you look as beautiful as you can be. (Who would have thought there was such a market! JK.)

Next look at margin profile by revenue segments: Some businesses could have different revenue streams with really different margin profiles. For example, a business could have a very profitable hardware business with a 40% gross margin that is growing at 10% YoY, and also a new business that is at a 1% gross margin, but growing really . This means if the new business category grows 30% YoY, the consolidated gross margins for the group would go down over time. Take time to understand why the company is going into a low margin business, and how they plan to grow margin over time.

A further deep dive into operating metrics of the business. If it's a phone company, literally go down into units sold as well as average price per unit sold. If it's software, look at churn rates/renewal rates. If it's a B2B company that has most of its revenues coming from 2-3 year contracts from SMEs, understand who are their top 20 customers, and how this is changing. Often, it's not a good idea to have most of your revenues coming from a few big customers, because there is the revenue impact if these customers decide to move away to a competitor.

Balance sheet items eg. Cash and Cash Equivalents as well as Debt. Look for these items on the balance sheet and analyze how these figures are trending on a 3 or 5 year historical basis. Also look to the company's IR call transcripts, where you can get further information on how they are planning to keep cash balance, or whether they plan to pay down debt etc.

Operating vs investing vs Financing cashflow gives you a sense of where the money in the company comes in/goes out. One metric is the operating cash flow ratio which measures how well a company can pay off its current liabilities with the cash flow generated from core business operations ie. how much a company earns from its operating activities per dollar of current liabilities. This is important since earnings involve accruals and can be manipulated by creative accounting, as such the operating cash flow ratio is considered a more accurate measure of a company’s short-term liquidity.

But essentially, you can look at 101 things but at the end of the day, you need to have the conviction of why you want to buy a particular stock. Is it because you feel it's undervalued, or you feel there is high growth potential? That conviction is also what is key when people are dumping the stock and you then have to decide why you bought the stock in the first place.