how to perform due diligence for stocks
below are 10 steps for individual investors undertaking due diligence most are related to stocks but in many cases they can be applied to bonds real estate and many other investments after those 10 steps we offer some tips when considering an investment in a startup company all of the information you need is readily available in the company s quarterly and annual reports and in the company profiles on financial news and discount brokerage sites a company s market capitalization or total value indicates how volatile the stock price is how broad its ownership is and the potential size of the company s target markets large cap and mega cap companies tend to have stable revenue streams and a large diverse investor base which tends to lead to less volatility mid cap and small cap companies typically have greater fluctuations in their stock prices and earnings than large corporations the company s income statement will list its revenue or its net income or profit that s the bottom line it s important to monitor trends over time in a company s revenue operating expenses profit margins and return on equity the company s profit margin is calculated by dividing its net income by its revenue it s best to analyze profit margin over several quarters or years and compare those results to companies within the same industry to gain some perspective now that you have a feel for how big the company is and how much it earns it s time to size up the industry in which it operates and its competition every company is defined in part by its competition due diligence involves comparing the profit margins of a company with two or three of its competitors for example questions to ask are is the company a leader in its industry or its specific target markets is the company s industry growing performing due diligence on several companies in the same industry can give an investor significant insight into how the industry is performing and which companies have the leading edge in that industry many ratios and financial metrics are used to evaluate companies but three of the most useful are the price to earnings p e ratio the price earnings to growth pegs ratio and price to sales p s ratio these ratios are already calculated for you on websites such as yahoo finance as you research ratios for a company compare several of its competitors you might find yourself becoming more interested in a competitor 