Here’s our 10-point checklist to help you assess the strength, stability, and potential of any stock.
1. Understand the Business
Before you dive into the numbers, understand what the company does. What products or services does it offer? How does it make money? Is the business model simple or complex? If you can’t explain it in a sentence or two, think twice before investing.
Tip: Stick to businesses you can understand—this is a cornerstone of Warren Buffett's investing philosophy.
2. Examine the Industry and Competitive Position
What industry does the company operate in, and how competitive is it? Consider factors like market size, growth trends, and barriers to entry. Is the company a leader, challenger, or follower? A strong market position often equates to pricing power and higher profit margins.
3. Check Revenue Growth
Has the company consistently grown its top line (revenue) over the past 5–10 years? Look for steady, sustainable growth rather than erratic spikes. This is a sign of a healthy, expanding business.
Look for year-over-year growth rates and compare them to peers in the same industry.
4. Analyze Profitability
Revenue means nothing if the company isn’t making money. Check metrics like net income, operating margin, and return on equity (ROE). Consistent profitability signals solid management and a viable business model.
5. Look at Debt Levels
Too much debt can sink even the most promising business. Examine the debt-to-equity ratio, interest coverage, and the company’s credit ratings. Compare these numbers with industry benchmarks.
A manageable level of debt isn't necessarily bad—what matters is the company’s ability to service it.
6. Evaluate Cash Flow
Free cash flow (FCF) is one of the most important indicators of a company’s financial health. Positive and growing FCF allows the company to reinvest, pay dividends, or reduce debt.
Operating cash flow should ideally be higher than net income.
7. Study Management Quality
Even the best business can falter under poor leadership. Look at the track record of the CEO and leadership team. Have they created value over time? How transparent and shareholder-friendly is their communication?
Read earnings call transcripts and shareholder letters to get a sense of management tone and vision.
8. Check Valuation Metrics
A great company isn’t always a great investment—especially if it’s overpriced. Use valuation ratios like Price-to-Earnings (P/E), Price-to-Book (P/B), EV/EBITDA, and PEG ratio to assess whether the stock is fairly valued compared to peers.
9. Review Dividends and Buybacks
Does the company return value to shareholders through dividends or stock buybacks? A steady or growing dividend can be a sign of financial stability. However, make sure payouts are sustainable and not eating into critical capital.
10. Consider External Risks
Look beyond the company itself. Are there regulatory, geopolitical, or macroeconomic risks that could impact performance? Think about currency exposure, supply chain disruptions, or changing consumer behavior.
Final Thoughts
No stock is perfect, and this checklist isn’t meant to predict the future. But it does help you develop a thorough understanding of what you're buying. By applying this 10-point checklist consistently, you’ll improve your ability to identify high-quality companies and avoid potential pitfalls.
Remember: Investing is part science, part art—and always about discipline.
Your Turn:
Do you use a checklist or framework when evaluating stocks? Drop your thoughts or additions in the comments below—we’d love to hear them!