Question: I'm considering buying a particular stock, but how do I "research" the company? What am I looking for, and where do I find it?

Ron Ziegler

Answer:

Dear Ron,

Good question!

The Annual & Quarterly Reports

You want to begin by getting a copy of the annual report and the quarterly statements. These are free from the company. (If you don't have the phone number or web site address, simply google the firm's name. Most companies have a section on their site where you can order these documents online. Click on "Investor Relations.")

The annual report summarizes the company's business for the past year. And, of course, it tells what the company does. You may think it odd I mention this, but a surprising number of investors spend a surprisingly amount of money on stocks they don't understand. It's important to know exactly how a company earns money - think back to Enron!

In addition to explaining its line of business, the annual and quarterly reports can also tell you if the company is headed in the right direction. Here are some of the key points to look for. If you want to make a more in-depth analysis of the annual report, read chapter 13 in John M. Dalton's excellent book, "How The Stock Market Works." It's published by the New York Institute of Finance.

• Look at the sales figures. Ideally they should be rising over time.
  
  
• Study the balance sheet. This presents a precise picture of the company's assets and liabilities on the last day of the fiscal year. Using this information, divide the current assets by the current liabilities to determine the current ratio. A current ratio of 2:1 or better signals that there are enough assets on hand to cover immediate debts.
  
  
• Examine profits. If they were down, what was management's explanation? You may find this in the letter from the Chairman, usually at the beginning of the report. Was it because of the elimination of some products or services? Price wars? Strength of the dollar versus foreign currencies? Poor managerial decisions?
  
  
• Take a look at long-term debt. This is a key figure. Divide long-term debt by long-term capital. (Long-term capital is long-term debt plus shareholders' equity.) If it is below 50% the company is probably solid. Keep in mind, the more debt, the less cash to help weather rough times or to expand research and development.
  
  
• Read the footnotes. They may point out problems. Look for impending lawsuits, heavy markdowns of inventory, adverse government regulations and other unusual events. You can also check the company's record on dividend payouts. A company that increases its dividend can be said to be prospering.

Value Line Investment Survey

The SEC requires exact and accurate presentation of a company's facts in its annual and quarterly reports. Nevertheless, the art work, letters from management and the overall slant is determined by the company. It can hardly be said to be prejudice-free.

Therefore, you need to study an independent evaluation of the stock you're considering.

My favorite is Value Line Investment Survey. This service, updated weekly, covers more than 1,700 stocks and their industries. Independent security analysts (in other words, they are employed by Value Line, not by a brokerage firm) review and then categorize stocks for timeliness of purchase and safety. The service also includes a weekly overall analysis of the market and general economic climate.

You'll find it full of excellent information, yet extremely easy to understand.

Check your library for a copy or go to: www.valueline.com.

BUYandHOLD does not recommend any securities. The security mentioned above is being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.