Before buying a stock, any good investor will tell you that it’s important to analyze a stock’s financials to be able to determine if the stock is worth buying.

Just like buying a car or a house, each stock has its own price, and usually for a reason. The goal of any good financial analyst is to determine if a stock is valued correctly, and to have some meaningful criteria for doing so.

Whether it’s analyzing financial ratios, studying financial documents in-depth, and reading annual reports, there are many ways to analyze a company’s financials. Every investor has his or her own unique perspective, and looks for different things in an investment. Some look only at certain financial ratios, while others look at financial statements and try to understand the big picture. Yet others will compare financials to competitors to see how a company is doing relative to their competition.

Let’s take a quick look at some common criteria that both seasoned and novice investors use to analyze the value of a stock.

Financial Ratio Analysis

Earnings ratios are probably the most common ratios used to determine the value of a stock. There are many ratios that investors use to value a stock. Here are a few common ones:

Earnings per share tells you how much net income a company earns per share. It is more informative than earnings alone since owning a share in a stock entitles you, the investor, to a proportional share of its earnings.

Price to Earnings Ratio is the ratio of stock price to earnings. This is what most investors consider to be the true price of the stock, since as an investor you are really buying a stake in the company’s future earnings.

The Current Ratio and Debt to Equity Ratios are both ratios that are related to the company’s balance sheet, and describe the financial health of a company. They tell you how much a company has in assets compared to its debts, or liabilities.

Financial Documents and Annual Report

Many people try to avoid reading the annual report because it is usually long, and frankly, boring. This is because much of it is dedicated to disclosing information it is required to report by the SEC. On the other hand, much of the information in company reports is critical to investors. There is a wealth of valuable financial and non-financial information contained in company statements. The annual report contains a company summary, the annual balance sheet, the income statement, and cash flow statement.

While there are many ways to analyze a stock’s value, most investors will agree that it is best to develop an objective method of screening and analyzing stocks. Luckily for you, we have developed a free stock analysis spreadsheet to help you with this. It will help you choose financial criteria, develop your own scorecard that automatically calculates a stock score based on your custom criteria, and calculate the intrinsic value of a stock. Most of the trading sites online offer trading tools, but this spreadsheet caters to investors. Try it out today — did we mention it’s free?

One great way to learn more about mastering the art of stock valuation is by learning about methods that other investors have successfully used to value stocks. If you’re interested in learning more about how to value stocks, Valuation Workbook: Step-by-Step Exercises and Tests to Help You Master Valuation (Wiley Finance) shows you how to go through the process methodically.