Rating stocks is a lot like rating companies. However, price and volume history provide additional clues about the direction and value of a company's shares. There are two main camps of analysis in terms of assessing a stock: fundamental and technical. Investors like to use fundamental analysis to locate what to buy and technical analysis to identify the right time to purchase. The following will show how to rate a stock based on cash flow, profitability and debt.
Obtain the annual report or 10K for the company that issued the stock. The annual report and/or 10K can be found on the website of the company of interest. Look for an "Investor Relations" tab.
You can also input a company's ticker symbol at a site such as Yahoo!Finance, and then click on "SEC Filings" to find what you need.
Rate the stock based on liquidity or the company's cash position. Free cash flow means a company is able to pay its current liabilities. Rate the company on a scale of 1 to 5, with 1 being low liquidity and 5 being high liquidity. Use the current ratio (current assets/current liabilities) as a measure. You can find this information on the balance sheet.
Rate the stock based on profitability. Making a profit is the key to making a return. Rate the company on a scale of 1 to 5; 1 is a company with low profitability and 5 is company with high profitability. Use profit margin (sales/net income) as a measure. You can find both of these line items on the income statement.
Rate the company based on debt. In finance, debt is equivalent to risk. A company with high debt ratios is a higher risk. Rate the company based on a scale from 1 to 5, with 1 being high debt and 5 being low debt. Use the Debt-to-Equity (long term debt/stockholder's equity) ratio as a measure. You can find these two line items on the balance sheet.
Add up the ratings for liquidity, profitability and debt. If life was fair, a higher rating should translate into a better investment. Alas, the best a rating can do is steer you in the right direction.
Things You'll Need
Calculator or spreadsheet
Company annual report or 10K