To become a savvy stock evaluator, you must master a multitude of skills. It's undeniably important to hone your quantitative kung fu by familiarizing yourself with financial statements such as the balance sheet, the income statement, and the statement of cash flows. But the qualitative side of the business -- the strengths and weaknesses that lie beyond the numbers it reports -- are no less crucial.
So what should I look for?
Good management is the first virtue Fools should seek in a business. How up-front and honest are a company's leaders? How much faith do you have in them? In good times and bad, look for a company whose earnings reports are free from hype or excuses, and whose managers are equally candid about their business's strengths and weaknesses.
Competitive advantages are also critical; some of the best companies have a sustainable edge over their competition. eBay
A model business's business model
Lastly, and no less importantly, investors should examine a company's business model -- how it goes about making money. Amazon.com
The lighter the business model, the more profitable the business generally is. Bricks-and-mortar stores can dominate rivals and make gobs of money, as Wal-Mart
The razor-and-blade model
King Gillette, inventor of the disposable safety razor, pioneered one of the most profitable business models around. A safety razor might just seem like a convenience to you, but savvy business observers see dollar signs.
Gillette shrewdly realized that once a consumer bought a razor, he would keep buying blades for it, generating lots of regular repeat sales. Therefore, the razor's pricing became far less important than that of the blades. Indeed, in World War I, many soldiers received free razors from Gillette -- an altruistic gesture, yes, but also a canny and profitable one. Procter & Gamble
Today's inkjet printers owe a clear debt to Gillette's clever model. You can buy a printer for your computer from Hewlett-Packard
Know another company with a compelling business model? Share your keen observation with your fellow readers in the comments box below -- or drop in on our free CAPS stock-rating community to swap opinions and analysis with more than 125,000 of your fellow Foolish investors.
Fool co-founders David and Tom Gardner are always on the lookout for compelling business models in their Motley Fool Stock Advisor newsletter service. See all their promising investment ideas with a free 30-day trial.
Longtime Fool contributor Selena Maranjian owns shares of eBay and Wal-Mart. Wal-Mart and eBay are Inside Value recommendations. eBay and Amazon.com are Stock Advisor picks. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.