Analyzing Data Before You Invest

by David Jenyns on September 7, 2009

Essentially, it is an effort to predict a company’s potential earning power and, hence, the present value of its stock as an investment.

The investment analyst’s raw materials are statistics. He studies earnings reports, balance sheets, stock-market records, and the various ratios that can be derived from them. He considers the company’s long-term debt schedule, its expansion plans — contemplated or under way — and its tax position.

The first is a statement of what the facts — and the surmises — suggest as to the general quality of the company. On a quality basis, for instance, a bright, young electronics company would almost certainly be considered inferior, say, to Westinghouse. Handsome earnings, however, might have to be discounted if speculative buying of the stock had already shot the price up.

On the other hand, if the company had been largely overlooked by investment analysts, and rested comfortably at a low price level, anticipation of even a modest increase in earnings could make the stock a worthwhile investment.

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