How to Research a Stock Before You Buy: A Beginner's Guide
Most investors buy stocks based on tips, news, or gut feeling. The edge comes from going to the source: the company's own financial reports. Here's how to research any stock like a professional, starting from zero.
Most investors buy stocks based on tips, news, or gut feeling. They hear about a company, check if the stock price is going up, and buy. When it drops, they panic and sell.
The edge comes from doing what most investors skip: going to the source. Every public company must file detailed financial reports with the government. These reports tell you exactly how much money the company makes, what they owe, and what risks they face. This information is free and available to anyone.
This guide shows you how to research any stock like a professional, starting from zero. No finance degree required.
Where Companies Report Their Financials
Every company listed on a U.S. stock exchange must file reports with the SEC (Securities and Exchange Commission). These filings are public and free to access.
The two reports that matter most:
| Report | What It Is | When Filed |
|---|---|---|
| 10-K | Annual report with full financials | Once per year (after fiscal year ends) |
| 10-Q | Quarterly update with recent numbers | Three times per year (Q1, Q2, Q3) |
You've probably heard of "annual reports"—the glossy documents companies send shareholders. The 10-K is the legal version: no marketing spin, just the required disclosures. It's where companies must tell the truth about their business.
How to find any company's filings:
- Go to SEC.gov/edgar
- Search by company name or ticker symbol
- Look for "10-K" for annual reports or "10-Q" for quarterly
Not sure where to start? Our 10-K section guide explains what each part of an annual report contains and where to find specific information.
The Three Financial Statements
Every company's financials come in three connected statements. Think of them as answering three questions:
1. Income Statement: Did They Make Money?
The income statement shows revenue (sales) minus expenses to get profit. It answers: "How much did they sell, and how much did they keep?"
Key lines to find:
- Revenue (or "Net Sales"): Total money from selling products/services
- Operating Income: Profit from running the business
- Net Income: Final profit after all costs and taxes
What to check: Is revenue growing year over year? Are profit margins stable or improving?
2. Balance Sheet: What Do They Own vs. Owe?
The balance sheet is a snapshot of everything the company owns (assets) and owes (liabilities) at a specific date.
Key lines to find:
- Total Assets: Everything of value (cash, property, inventory, etc.)
- Total Liabilities: Everything they owe (loans, unpaid bills, etc.)
- Stockholders' Equity: Assets minus liabilities (what's left for owners)
What to check: Is debt growing faster than assets? Do they have enough cash to pay short-term bills?
3. Cash Flow Statement: Is the Money Real?
This is the most honest statement. While income statements can be manipulated through accounting choices, cash either exists or it doesn't.
Key sections:
- Operating Cash Flow: Cash generated from running the business
- Investing Cash Flow: Cash spent on equipment, acquisitions, etc.
- Financing Cash Flow: Cash from borrowing or issuing stock
What to check: Is operating cash flow positive? Is it close to or above reported net income?
Why cash flow matters: A company can report profits while running out of cash. If "Operating Cash Flow" is consistently lower than "Net Income," the company may be using aggressive accounting to inflate earnings. This is the first red flag to look for.
Five Numbers Every Investor Should Check
You don't need to analyze every line item. Start with these five numbers that reveal the most about a company's health:
1. Revenue Growth
What it tells you: Is the business growing?
Where to find it: Income statement, compare this year to last year
What's good: Consistent growth that matches or beats the industry. Sudden spikes or declines need explanation.
2. Profit Margin
What it tells you: How much profit do they keep from each dollar of sales?
How to calculate: Net Income ÷ Revenue × 100
What's good: Stable or improving margins. Margins that compress year after year suggest pricing pressure or rising costs.
3. Free Cash Flow
What it tells you: How much real cash is left after running and maintaining the business?
How to calculate: Operating Cash Flow − Capital Expenditures
What's good: Positive and growing free cash flow. This is cash that can be used to pay dividends, buy back stock, or invest in growth.
4. Debt Level
What it tells you: Can they survive a downturn?
What to check: Total Debt ÷ Equity (called "Debt-to-Equity ratio")
What's good: Lower is generally safer. Compare to industry peers—some industries (utilities, banks) normally carry more debt than others (tech, software).
5. Return on Invested Capital (ROIC)
What it tells you: How good is management at putting money to work?
Why it matters: A company that earns 20% on every dollar invested is creating more value than one earning 5%. Over time, high-ROIC companies tend to outperform.
Where to find it: Not usually stated directly—use a financial data tool or calculate manually.
Want the formulas? See our financial metrics catalog for definitions, calculations, and what each metric reveals about a company.
Red Flags to Watch For
These warning signs don't mean a stock is bad, but they do mean you should investigate further.
Revenue Growing, Cash Flow Shrinking
If revenue goes up 20% but operating cash flow drops, the company may be:
- Selling on credit and not collecting payments
- Stuffing inventory that isn't selling
- Using aggressive revenue recognition
How to spot it: Compare revenue growth to operating cash flow growth over 3+ years.
Excessive Stock-Based Compensation
Many companies pay employees with stock instead of cash. This doesn't show up as an expense in the traditional sense, but it dilutes existing shareholders.
How to spot it: Find "Stock-Based Compensation" in the cash flow statement or footnotes. If it's more than 10% of revenue, shareholder dilution is significant.
Real example: In fiscal 2024, Intuit's stock-based compensation was $1.97 billion—10.5% of revenue. That's real cost to shareholders that doesn't appear in traditional profit metrics.
Sudden Accounting Changes
Companies choose how to recognize revenue and expenses. When they change methods, ask why.
How to spot it: Look for "Changes in Accounting Policies" in the footnotes or MD&A section of the 10-K.
New Risk Factors
Companies must list everything that could go wrong in the "Risk Factors" section. When new risks appear that weren't there last year, management is signaling concern.
How to spot it: Compare this year's risk factors to last year's. New additions and escalated language ("may impact" becoming "will likely impact") are warning signs.
Reading the Risk Factors Section
Most investors skip risk factors because they look like legal boilerplate. But this section is where companies must disclose what could hurt them—and changes year over year tell you what's emerging.
What to look for:
| Change Type | What It Means |
|---|---|
| New risk | Management is newly worried about something |
| Escalated language | An existing risk is getting worse |
| Removed risk | Either resolved or no longer considered material |
Example pattern: If a company adds three new risk factors about AI competition that didn't exist last year, they're signaling concern about disruption—even if the PR team won't say so publicly.
Deep dive: Our 10-K section guide covers risk factors in detail, including how to compare year over year and what to prioritize.
When to Dig Deeper
The basics above will screen out most bad investments. But sometimes you'll find something that looks interesting and deserves more research.
Investigate the Footnotes
The footnotes to financial statements contain the details that don't fit in the main tables. When we analyzed 314 recent annual reports, footnotes made up 37% of the total filing—but most investors skip them entirely.
Important footnotes:
- Revenue Recognition: How and when they record sales
- Segment Information: Breakdown by business unit or geography
- Stock-Based Compensation: Full dilution picture
- Commitments and Contingencies: Hidden liabilities
For International Companies
Non-U.S. companies listed in the U.S. file different forms:
- 20-F: Annual report for foreign companies (instead of 10-K)
- 6-K: Periodic updates (instead of 10-Q)
These follow different accounting standards (often IFRS instead of U.S. GAAP), so comparisons require adjustment.
International investing: See our 20-F investor guide and Form 6-K explainer for non-U.S. company filings.
For Quarterly Updates
Don't wait for annual reports. Quarterly 10-Q filings show trends as they develop. A company's situation can change significantly in three months.
What to check quarterly:
- Revenue trajectory (accelerating or decelerating?)
- Cash position (improving or deteriorating?)
- Management commentary changes
See our 10-Q quarterly filing guide for what to focus on.
Tools to Speed Up Your Research
Reading filings manually works, but it's slow. Here's how to be more efficient:
SEC EDGAR
The official source. Free, comprehensive, but not user-friendly. Best for finding specific filings when you know what you're looking for.
MetricDuck Filing Intelligence
Our tool extracts the key sections from filings automatically, highlights changes over time, and links to source text for verification.
Try it on any company:
- Apple Filing Intelligence — See segment breakdown and risk evolution
- NVIDIA Filing Intelligence — Concentration risk and growth drivers
- Adobe Filing Intelligence — Accounting quality signals
Every insight links back to the original SEC filing so you can verify.
What Comes Next
This guide covers the fundamentals. As you get comfortable, you can go deeper:
For earnings quality analysis:
- Earnings Quality: Complete Framework — Detailed cash flow verification
- Earnings Quality Hub — All our accounting analysis posts
For capital efficiency:
- ROIC: The Complete Investor Guide — Understanding return on capital
- ROIC Analysis Hub — Sector comparisons and rankings
For specific sectors:
The goal isn't to become a professional analyst. It's to make informed decisions based on actual data rather than headlines. Start with one company you're interested in, pull up the 10-K, and practice finding the five numbers that matter most.