Key Takeaways
- 1Stock analysis follows a systematic framework, not gut feeling
- 2Start with the business model, then examine financials, then check valuation
- 3Our 6-factor model automates much of this process quantitatively
- 4Combine quantitative screening with qualitative understanding
#The Stock Analysis Framework
Step 1: Understand the Business
Before looking at any numbers, answer these questions:
- What does the company sell? Products, services, or both?
- Who are the customers? Consumers, businesses, or governments?
- How does it make money? Revenue model (subscriptions, transactions, advertising, licensing)?
- What is the competitive advantage? Why can competitors not easily replicate this business?
If you cannot explain the business in one sentence, you probably should not invest in it.
Step 2: Examine Financial Health
Key financial statements to review:
| Statement | What It Tells You | Key Metrics |
|---|---|---|
| Income Statement | Profitability | Revenue growth, gross margin, operating margin, net income |
| Balance Sheet | Financial strength | Debt/equity, current ratio, cash position |
| Cash Flow Statement | Cash generation | Operating cash flow, free cash flow, capex |
Read: How to Read Financial Statements →
Step 3: Evaluate Profitability
Profitability is the single most important factor in our model (30% weight):
- Gross Margin — Is the company charging premium prices? Learn more →
- Operating Margin — Is management controlling costs? Learn more →
- Return on Equity — Is the company earning strong returns for shareholders? Learn more →
- Free Cash Flow — Is the company generating real cash?
Step 4: Check Valuation
A great company at a terrible price is a bad investment. Key valuation metrics:
- P/E Ratio — Price relative to earnings Learn more →
- EV/EBITDA — Enterprise value relative to operating earnings
- Price/Book — Market cap relative to net assets Learn more →
- Free Cash Flow Yield — Cash return on investment
Step 5: Assess Momentum and Trends
- 12-month price return — Is the stock trending up or down?
- Earnings revisions — Are analysts raising or lowering estimates?
- Revenue trajectory — Is growth accelerating or decelerating?
Step 6: Evaluate Risk
- Beta — How volatile is the stock relative to the market?
- Debt levels — Can the company service its debt comfortably?
- Short interest — Are professionals betting against it?
- Concentration risk — Does the company depend on one product or customer?
#How Our Factor Model Simplifies This
Our 6-factor ranking system automates most of this framework:
| Analysis Step | Our Factor |
|---|---|
| Profitability | Profitability factor (30%) |
| Valuation | Value factor (15%) |
| Trends | Momentum factor (25%) |
| Risk | Stability factor (10%) |
| Capital allocation | Investment factor (10%) |
| Professional sentiment | Short Interest factor (10%) |
Instead of manually analyzing each dimension, our composite score synthesizes all six into a single ranking.
Last updated: February 10, 2026