Order matters
Research in this order: business model, then financials, then valuation. Starting with a cheap-looking P/E is how people end up owning a business they do not understand.
1. Understand the business
Before any numbers, answer three questions:
- How does the company make money, and from whom?
- Why do customers choose it over competitors?
- What would have to go wrong for customers to leave?
A good test: can you explain the business in two sentences to a friend? If not, keep reading the annual report (the 10-K) or listen to an earnings call until you can.
2. Run a SWOT, weighted to the future
SWOT lists Strengths, Weaknesses, Opportunities and Threats. For long-term investing, weight Opportunities and Threats most. Strengths and weaknesses describe today; opportunities and threats describe where the business is heading, and that is what you are paying for.
Look for a durable advantage, called a moat: switching costs, network effects, scale, patents or regulation, or brand. See Economic moats.
3. Apply the double-or-halve test
Ask two questions: what are the odds this company doubles in three to five years, and what are the odds it loses half its value over the same time? Only buy when the first is clearly larger. See The double-or-halve test.
4. Check the financials
Read the balance sheet the way you would judge a person's finances. One relative has credit cards and a car loan and no savings; another has savings and no debt. You know which one survives losing a job. Companies are the same.
Check, in order:
- Revenue growth (TTM and forward): is it strong and holding up?
- EPS growth (TTM and forward): are earnings growing, ideally faster than revenue?
- Gross margin and Net margin: are they high, and rising or falling?
- Balance sheet strength: cash versus debt: is there more cash than debt?
- Free cash flow: does the business generate real cash?
5. Then valuation
Only now look at price. Compare the forward P/E ratio (price-to-earnings) with expected earnings growth; the PEG ratio does this in one number. A company that passes everything but valuation goes on a watchlist.
Market cap versus potential
Compare the company's size with the size its market could support. A $10 billion company in a market where leaders reach $100 billion has room to grow; a company already worth most of its market does not. This is a rough check, not a formula.
Keep learning
Your research gets better with every company you study. Business models repeat across industries, and margins reveal who has pricing power. See Building your investing knowledge.
See also
- The double-or-halve test A quick way to judge risk and reward before buying a stock: compare the odds it doubles in three to five years with the odds it loses half.
- Economic moats What an economic moat is, the five main types of competitive advantage, and how to tell whether a company's moat is widening or shrinking.
- How to read financial statements A beginner's guide to the three financial statements, the income statement, balance sheet and cash flow statement, and how they fit together.
- Earnings reports and calls What happens during earnings season, how to read an earnings release, what to listen for on the call, and why guidance moves stocks more than results.
Pages that link here: Building your investing knowledge, Finviz screener guide, Fundamental analysis, Investing FAQ, Market capitalization, Stock screening and scoring
Last updated September 30, 2026. Education only, not investment advice.