How to Pick a Good Stock to Buy

Why do people invest? To increase their wealth people invest in stocks. Profit maximization is the main goal of the investor. Pursuing profits often involves an element of risk. As a potential investor, you can reduce the risk by familiarizing yourself with the financial health of the company that interests you.

You don't need to be a financial teacher to assess a company's financial position. All you have to do is interpret the numbers listed in the company's financial statements. You can easily get point and figure charts for more insight in less time.

The real value of financial statements (balance sheet, income statement) and cash flow statement lies in the fact that financial statements provide valuable information that is used to predict future income, dividends, and free cash flow.

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Capital Structure

What proportion of current and long-term debt and equity are used to finance the company's operations? The financing arrangement determines how the value of the company is sliced. The company might initially have raised cash for its operations by issuing more debt than equity.

After a while, company management can consider changing the mix by issuing more equity and using the results to withdraw its debt and provide safety margins. Information about the company's capital structure can be easily taken from Balance Sheet data, which is a snapshot of the company's financial status on a certain date.

Calculating total liabilities compared to total asset ratios can help you get better estimates of investment risk. A high debt ratio raises a red flag – creditors have supplied most of the funds and in case of bankruptcy they are paid in advance.