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How to Research Potential Investments Before You Buy

By Motley Fool Staff - Jan 1, 2016 at 9:17AM

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Here are a few key things to look for in companies so you can make stable, healthy investments.

In the sea of factors to consider before investing in a company, do you know what to focus on?

In this clip, The Motley Fool's Todd Campbell and Kristine Harjes go through some of the key metrics to look at when you're trying to visualize the big picture of a company's viability: where to find performance graphs, which are the most important data points to consider, how to interpret current ratios, and how to read between the lines of a company's balance sheet to see what's on its mind for the future.

A full transcript follows the video. Listen to the full podcast by clicking here.


Todd Campbell: And one of the other things that I think is really important when you're considering the impact on balance sheets and how to look at the balance sheet, what important takeaways there are from the balance sheet, is to evaluate what the trend has been in the different metrics that are displayed in the balance sheet. So, you've got to consider the current ratio is helpful; the debt-to-equity ratio is helpful; it's important to know what's going on with the business. For example, what's happening with Pfizer and Allergan.

But you also can glean some insight by saying, "OK, what's going on with the individual pieces or components of the balance sheet?" Is cash, for example, growing over time? Is long-term debt, for example, falling over time? And what that can indicate to you is, OK, you've got a company that is building up its cash; that can be used to reinvest in companies or new products, or that it's paying down its debt, and it's gonna have to pay less out in interest expense, and therefore could deliver more money to net income.

Obviously, if you look at the SEC website and you find a balance sheet and look at it, it's a static number. So, you're going to have to find websites that allow for charting of this information. But they're out there. Motley Fool uses YCharts, for example, to pull a lot of this data together, and trend it out.

Kristine Harjes: Yeah. You'll find a lot of articles on our website that include these visuals, so you can get a sense of what's happening with the cash position or the debt or any of these trends that you might be interested in digging a little bit deeper into. As Todd mentioned, that's so important, because it gives you more context for the company. One static number can't really paint the whole picture. 

Going even beyond that, about painting the whole picture, one thing I definitely want to mention is that you can't just look at the balance sheet and say, "Oh my gosh, Bristol-Myers, they win here." You do also want to look at the other things you hear us talk about on the show all the time, like pipeline and key drugs. So, definitely take a holistic approach when you're doing your research.

As always, remember that people on this program could have an interest in the stocks they talk about. The Motley Fool could have formal recommendations for or against, so don't buy or sell based solely on a balance sheet, and don't buy or sell based solely on what you hear. Make sure that you're doing your own research.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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