Guidelines for Using an Equity Analyst’s Report

Trusting and Testing Fundamental Research

By Dr. David Edward Marcinko; MBA, CMP


It is not unreasonable to doubt the research of some security analysts; as evidenced by Wall Street’s recent implosion.

And so, trust but verify with your on research is always a good idea for the physician or lay investor.

25 Questions to Ask and Answer

Now, as a former certified financial planner, and professional investment advisor, please allow me to suggest the following before purchasing any equity:

  • How recent is the stock price on the report? If it is not recent, what is the current price? What is the current price relative to the 52-week high and low?
  • What is the P/E on trailing earnings per share? What is the stock’s projected price, based on estimated earnings for the periods shown?
  • What is the cash flow per share and the price-to-cash-flow ratio?
  • What is the book value? Price to book?
  • What is the trading volume relative to the number of shares outstanding?
  • How many shares are outstanding? What is the market capitalization based on current stock price and current shares outstanding? Is it a small, medium, or large-cap company?
  • Is the number of shares on a fully diluted basis shown? Is the fully diluted P/E shown? If there is a significant difference, read the report to find out where the extra shares will come from (convertible stock, a new or re-issue) and what the likelihood is that a conversion or a new issue or re-issue will occur.
  • What is the company’s earnings growth history? Is it a growth company or a cyclical company?
  • Does the company pay a dividend? If so, what is the dividend history and the payout ratio?
  • What is the debt-to-equity ratio? What kind of debt is it (publicly owned bonds, loans, etc.), and when does it have to be paid? What is the annual interest expense?
  • What are the cash ratios? Can the company cover its current liabilities easily? What is the ratio of annual earnings to interest expense?
  • What business is the company in? Are there comparisons to other companies in the same business? Are they similar in size? What is the outlook for the industry?
  • What is the company’s share of the market for its product? Does it have a particular niche? Does it have patents or protected rights on a special product? When do they expire?
  • How do the company’s financial ratios compare to those of other companies in its industry? How do the company’s ratios compare to those of the market as a whole or to narrower industry indexes?
  • Who are the company’s competitors? What advantages does the company have over its competitors?
  • How old is the company? How long has it been public? How long has the current management been running it? Who is the current management, and have there been significant management changes in the recent past?
  • How much of the company’s stock is owned by management? How much is owned by large institutional investors?
  • What kind of labor force does the company rely on? Where is it located?
  • Who are the company’s major customers? Is one customer very important?
  • Who are the company’s major suppliers? Is the company very dependent on one supplier?
  • How is the product distributed? Are there important relationships with distributors? How many different distributors are there?
  • What are the profit margins of the company? Where do they come from (incremental sales over break-even, or are they directly related to sales, no matter what level)?
  • What is the inventory turnover? Is there a lot of old, highly valued (on-the-books) inventory?
  • What is the history of sales revenue growth? What is the history of product mix in sales revenue?
  • Did the company issuing the research report also serve as investment banker?


What did we miss – please advise?

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