Stock Analysis Guide

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What it is

Fundamental stock analysis framework covering financial statement analysis, DCF valuation modeling, key financial ratios, stock screening criteria, competitive moat assessment, and earnings quality evaluation.

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File: SKILL.md
Length: 491 lines2,621 words, about 12 min read
Category: Personal financeinvesting
Level: Beginner
License: Apache-2.0

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Stock Analysis Guide

You are a fundamental equity research analyst who helps users develop a structured, repeatable process for analyzing individual stocks. You teach users to read financial statements, calculate intrinsic value, assess competitive advantages, and make informed decisions grounded in data rather than hype.

IMPORTANT DISCLAIMER: This skill provides general financial education and analytical frameworks only. It is NOT financial advice, and it does NOT constitute a recommendation to buy, sell, or hold any security. Stock investing involves risk, including the possible loss of your entire investment. Past performance does not guarantee future results. Always consult a qualified, licensed financial advisor before making any investment decisions. Do your own research and never invest money you cannot afford to lose.

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Metric	Threshold	Why It Matters
P/E Ratio	Below sector median	Relative cheapness
P/B Ratio	Below 3.0	Not overpaying for assets
Debt/Equity	Below 1.0	Manageable leverage
Free Cash Flow Yield	Above 5%	Cash generation relative to price
Dividend Yield	Above 2% (if applicable)	Shareholder return

Metric	Threshold	Why It Matters
ROE	Above 15%	Efficient use of equity
Revenue Growth (5yr)	Above 5% CAGR	Growing business
Operating Margin	Above sector median	Pricing power
Current Ratio	Above 1.5	Short-term solvency
Interest Coverage	Above 5x	Can service debt easily

Metric	Threshold	Why It Matters
Revenue Growth (3yr)	Above 15% CAGR	Rapid expansion
EPS Growth (3yr)	Above 20% CAGR	Earnings acceleration
R&D as % of Revenue	Investing in future	Innovation pipeline
TAM Expansion	Growing addressable market	Runway for growth

Ratio	Formula	Good Threshold	What It Tells You
Gross Margin	Gross Profit / Revenue	Industry dependent	Pricing power
Operating Margin	Operating Income / Revenue	>15%	Operational efficiency
Net Margin	Net Income / Revenue	>10%	Bottom-line profitability
ROE	Net Income / Shareholders' Equity	>15%	Return on equity invested
ROA	Net Income / Total Assets	>5%	Asset utilization efficiency
ROIC	NOPAT / Invested Capital	>WACC	True return on all capital

Ratio	Formula	Context	Caution
P/E	Price / EPS	Compare to sector and history	Can be distorted by one-time items
Forward P/E	Price / Next Year's EPS estimate	Growth expectations	Relies on analyst estimates
P/FCF	Price / Free Cash Flow per Share	Cash-based valuation	More reliable than P/E
EV/EBITDA	Enterprise Value / EBITDA	Capital-structure neutral	Good for comparing across debt levels
P/B	Price / Book Value per Share	Asset-heavy businesses	Less useful for tech/services
PEG	P/E / EPS Growth Rate	Growth-adjusted valuation	<1.0 may indicate undervaluation

Ratio	Formula	Healthy Range	Red Flag
Current Ratio	Current Assets / Current Liabilities	1.5-3.0	Below 1.0
Quick Ratio	(Current Assets - Inventory) / Current Liabilities	>1.0	Below 0.5
Debt/Equity	Total Debt / Shareholders' Equity	<1.0	Above 2.0
Interest Coverage	EBIT / Interest Expense	>5x	Below 2x
FCF/Debt	Free Cash Flow / Total Debt	>20%	Below 5%

Margin of Safety	Interpretation
>40% undervalued	Strong buy candidate (verify assumptions)
20-40% undervalued	Attractive entry point
0-20% undervalued	Fairly valued, wait for dip
0-20% overvalued	Fully valued, no margin of safety
>20% overvalued	Overvalued, avoid or consider selling

Stock Analysis Guide

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Stock Analysis Guide

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Stock Analysis Guide

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Stock Analysis Guide

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When to Use

Questions to Ask First

The Stock Analysis Process

Step 1: Stock Screening Criteria

Value Screen

Quality Screen

Growth Screen

Step 2: Business Understanding Checklist

Step 3: Financial Statement Analysis

Income Statement -- Key Lines to Examine

Balance Sheet -- Key Lines to Examine

Cash Flow Statement -- The Most Important Statement

Step 4: Key Financial Ratios

Profitability Ratios

Valuation Ratios

Health Ratios

Step 5: Competitive Moat Assessment

Step 6: DCF Valuation Model

Simplified DCF Template

Margin of Safety Guidelines

Sensitivity Analysis

Step 7: Risk Assessment

Step 8: Decision Framework

Earnings Quality Red Flags

Process

Output Format

Edge Cases

Example