Article -> Article Details

I used to think looking at a stock price was enough to know if a company was doing well. It’s funny looking back because I was so wrong. The price you see on your screen is just the tip of the iceberg. To really see what is happening, you have to look underwater at the data and the ratios.

Learning how to analyze stocks using advanced market data and ratios might sound like something only people in suits do. But once you get the hang of it, it actually feels like being a detective. You are looking for clues that tell you if a stock is a bargain or a trap.

Moving Beyond the Basics

Most people start with the Price-to-Earnings (P/E) ratio. It is okay, but it doesn't tell the whole story. If a company is growing fast, a high P/E might actually be a steal. That is why I started looking at the PEG ratio.

The PEG ratio takes that P/E and divides it by the growth rate.

• A PEG of 1 means the stock is fairly valued.

• Below 1 usually suggests it might be undervalued.

• Above 1 might mean you are paying too much for that growth.

I remember looking at a tech stock last year that had a P/E of 40. I almost walked away. Then I saw its growth was 50 percent. The PEG was 0.8. I realized the market was actually underestimating it.

The Secret in the Cash Flow

Earnings can be manipulated. Companies have all sorts of accounting tricks to make their "profits" look better than they are. But cash? Cash is harder to fake.

I always check the Free Cash Flow (FCF). This is the money left over after the company pays for everything it needs to keep running.

• Look for positive FCF that grows every year.

• Compare FCF to Net Income.

• If Net Income is high but FCF is low, something is weird.

If a company is reporting huge profits but isn't actually bringing in cash, where is that money going? Usually, it's stuck in unpaid bills or sitting in unsold inventory. I’ve learned to be very careful with companies that "earn" money but don't "collect" it.

Efficiency Ratios that Matter

You want to know if the management is actually good at their jobs. Numbers like Return on Equity (ROE) and Return on Invested Capital (ROIC) are great for this.

I prefer ROIC because it includes debt. It shows how much profit a company makes for every dollar of capital they put into the business.

• High ROIC (above 15%) usually means the company has a "moat."

• It suggests they can reinvest their own money to grow even more.

• Low ROIC means they are just spinning their wheels.

Think of it like a lemon stand. If you spend 10 dollars on lemons and sugar and make 20 dollars, your return is great. If you have to spend 90 dollars to make 100 dollars, you are working way too hard for very little gain.

Reading the Balance Sheet for Safety

Debt can kill a good company. I always look at the Debt-to-Equity ratio. It tells you how much the company owes compared to what it actually owns.

• A ratio below 1 is usually safe.

• In some industries like utilities, higher debt is normal.

• Always compare a company to its neighbors in the same industry.

I also check the Interest Coverage Ratio. Can they pay the interest on their loans with the money they are making right now? If this number is low, one bad quarter could put them in serious trouble. I don't like losing sleep over a company's debt.

Using Advanced Market Data

Beyond the financial statements, there is "level 2" market data. This shows you the "order book." You can see exactly how many people want to buy at what price.

• Big "buy walls" can act as support.

• Large sell orders can act as a ceiling.

• Volume tells you if a price move is real or just noise.

When a stock price jumps on low volume, I usually don't trust it. It’s like a crowd at a concert. If only two people are cheering, it's not a hit. If the whole stadium is screaming, something big is happening.

Why Technical Indicators Help

I’m mostly a fundamental guy, but I use technicals to time my entries. The Relative Strength Index (RSI) is my favorite tool for this.

• If RSI is over 70, the stock is "overbought." I wait for a dip.

• If RSI is under 30, it might be "oversold." That is often when I start looking to buy.

• I also watch the 200-day Moving Average to see the long-term trend.

I once bought a "cheap" stock that just kept getting cheaper. I didn't realize it was in a massive downtrend below its 200-day average. Now, I never fight the trend.

Putting It All Together

Analyzing a stock isn't about finding one perfect number. It is about building a case.

1. Check the moat with ROIC.

2. Verify the growth with the PEG ratio.

3. Ensure safety with the Debt-to-Equity ratio.

4. Confirm the entry point with RSI and volume.

Do you feel like you're just guessing when you buy a stock? If so, start with one of these ratios today. Pick a company you own and find its PEG ratio. It might surprise you.