What I Analyze
The first thing I look at when researching a company is the cash flow statement. Cash flow from operating activities is the cash the business produces, so I always want this number to be steady, positive, and hopefully improving, but as long as its positive and steady it gives me confidence to do more research. Cash flow from operating activities should be low or negative. This is the cash a company gets from issuing debt, selling stock, borrowing from the bank, etc., so it's best if it's negative. Cash produced from the business should be fueling growth, and checking the correlation with financing activities is the best way to do that. This is what I look at with small-caps especially, if a small company can fuel its own growth, I'm interested immensely. The cash flow statement is the most important statement but gets the least amount of attention -- always make sure to check it. If the company is reporting great earnings growth but is borrowing from the bank to fuel that growth, it's not that great of a company.
The next thing I look at is the balance sheet. The ideal balance sheet is one with a high amount of cash and cash equivalents with no debt. But, different companies operate in different ways, so some will always have debt. Utilities almost always have high amounts of debt, because that's the way they operate. Basically, I like to see a company that has enough cash so that it could handle at least 2-4 quarters of a business slow-down. If a company needs $30 million per year to operate, I'd want the company to have $30 million in cash, and hopefully not too much or any long-term debt. You can get the rough amount a company needs to operate by adding cash from operating activities to cash from financing activities. Just get a rough idea of how much trouble the balance sheet could keep the company above water, because business problems are bound to come up sometime. If the company has so little cash that they'll need to borrow from the bank for cash during a rough spot, I'd stay away from that company.
I actually don't pay too much attention to the income statement. If the cash flow statement and balance sheet both look good, the company should be able to produce earnings, but that depends on management. With the income statement, just see if margins are holding steady, if earnings are growing, maybe seeing which quarters are weakest for the company (for example, most retailers have poor quarters in the summer months). I analyze the statement, but I don't feel it's quite as important as the balance sheet and cash flow statement. It has its value, just not quite as much as the other statements.
The P/E is a touchy subject. It's great if it's low most times, but if it's high I see why it's high. You will almost always have to pay a premium for a company's growth. Starbucks has always been trading at a premium since going public in 1992, and many people have shied away from them as a result (which is fine, don't go past your comfort level). With the P/E, if it's a great company that's producing nicely and has a strong balance sheet, I'll be willing to pay a premium in most cases. See if you think the stock deserves the P/E it's getting based on what you found in the statements. Should it be higher? Is it low compared to the company's competitors? Is it high for a reason? The P/E is a pretty good indicator of how the market is pricing the stock compared to the industry or its competitors, but other research needs to be done.
Everything else that I check is mostly available on Google and Yahoo! I take a look at management, just to see how much experience they have with the company or industry and how long they've been with the company. See how things have gone since they've come aboard. I do a quick check to see how much insiders own of the company and see what their recent activity has been with the stock. I don't let this affect my decision, but I like to know what insiders are doing. I think high inside ownership with a smaller company is a good sign, because smaller businesses are risky choices, but I feel more comfortable if management has a good stake. I also like this because managers of smaller companies often aren't as wealthy as exec's at ExxonMobil, Coca-Cola, etc.
Look at a company's press releases, and if management gives guidance, see if they've met it. Many managers are too optimistic, and I don't particularly like that. If management's met it's word, I take it as a good sign and give them trust that they'll be able to meet estimates in the future. Press releases often show what growth the company is aiming for, and while it might be different from my estimates, I make a note of it.
Finally, I look at the company's web site to get a deeper understanding of the company's products, and take a look around through the online investors area (often called 'Investor Relations' on a company's web site). Some companies have webcast replays available online, and if they do, I try to listen to the most recent one (webcasts are where management discusses the latest quarter and gives the opportunity for people to call in and ask questions).
After looking through all of this, you'll get a great idea of where the company is and where management wants to take it. Some are easy to analyze, some are more difficult. Overall, it takes me probably 3-5 hours to analyze a company this in depth. It's actually not too hard, just research what you can when you can. It gets easier after you try it out a couple times, you may even develop your own things to really look out for. Be patient, maybe start with companies you already roughly know about, and see how it goes. I think the reason many people find it so difficult to analyze financials is because they don't know what to look for, but I think everything above is key and can be the basis of the research.
Here's a summary of what I analyze, in this order.
-- cash flow statement
-- balance sheet
-- income statement
-- insider ownership and activity
-- press releases - look for estimates/guidance, among other things
-- web site (product info, investor relations)
-- webcasts, if available