What is the single most important metric to analyze a stock?

Free cash flow is one of the most reliable metrics because it reflects real cash a company generates after reinvestment.

How do I know if a stock is overvalued?

Compare valuation ratios like P/E and FCF yield to sector peers, and check if growth justifies the premium.

What is a good ROIC for a quality business?

A ROIC consistently above 10–15% is generally considered strong, especially if it exceeds the company’s cost of capital.

Should I use technical analysis or fundamentals?

Use fundamentals to select quality businesses and valuation, then technical analysis to optimize entry points and risk.

Complete Guide: How to Analyze a Stock in 2026

Investing in the stock market without properly analyzing a stock is like sailing without a compass. In this comprehensive guide, we'll break down all the methods to evaluate a publicly traded company and make informed decisions.

This guide is part of a series: check out our detailed articles on the P/E ratio, free cash flow analysis, ROIC, interest coverage, debt-to-equity ratio, and volatility & beta.

Why Analyze a Stock?

Before investing your hard-earned money, you need to answer these questions:

Is the company profitable? - Fundamental analysis
Is the stock undervalued or overvalued? - Valuation ratios
What is the risk level? - Volatility and correlations
Is the momentum favorable? - Technical analysis

Part 1: Fundamental Analysis

Fundamental analysis involves studying the financial fundamentals of the company.

Essential Metrics

1. Revenue

This is the total amount of sales. Consistent growth is a good sign.

What to watch:

YoY (Year-over-Year) growth > 10% = Excellent
Stable growth 5-10% = Healthy
Stagnation or decline = Warning signal

2. Net Income

The money left after all expenses. This is the true profit.

What to watch:

Net margin > 15% = Very profitable company
Net margin 5-15% = Average
Net margin < 5% = Fragile

3. P/E Ratio (Price-to-Earnings)

The most commonly used ratio to evaluate if a stock is expensive or not.


P/E = Stock Price / Earnings Per Share (EPS)

P/E	Interpretation
< 15	Potentially undervalued
15-25	Normal valuation
25-40	Growth expected
> 40	Very expensive or hyper-growth

Learn more: Understanding the P/E Ratio in Detail

4. P/B Ratio (Price-to-Book)

Compares the stock price to the company's book value.


P/B = Stock Price / Book Value Per Share

P/B < 1: Stock worth less than company assets (opportunity or value trap?)
P/B > 3: High valuation of intangible assets (brand, tech, IP)

5. Dividend Yield

The annual return in dividends.


Dividend Yield = Annual Dividend / Stock Price × 100

Strategies:

Value investor: > 3% with stable growth
Growth investor: 0-1% (profit reinvestment)

Part 2: Technical Analysis

Technical analysis studies charts and price patterns to anticipate movements.

Key Indicators

1. Moving Averages (MA)

50-day MA: Short-term trend
200-day MA: Long-term trend
Golden Cross: 50 MA crosses 200 MA upward = Bullish signal
Death Cross: 50 MA crosses 200 MA downward = Bearish signal

2. RSI (Relative Strength Index)

Measures the speed and magnitude of price movements.

RSI	Signal
> 70	Overbought - Possible correction
30-70	Neutral zone
< 30	Oversold - Possible bounce

3. Volume

Volume confirms or invalidates a price movement.

Price up + Volume up = Validated movement
Price up + Volume down = Fragile movement
Price down + Volume up = Strong selling pressure

Part 3: Evaluating Risk

Volatility

Volatility measures the amplitude of price variations.

Classification:

Annualized volatility < 20%: Low risk
Volatility 20-40%: Moderate risk
Volatility > 40%: High risk

Learn more: Volatility and Beta: Measuring Risk

Beta

Beta measures a stock's sensitivity relative to the market.

Beta	Behavior
< 0.8	Less volatile than market
0.8-1.2	Follows the market
> 1.2	More volatile than market

Concrete examples:

Apple (AAPL): Beta ~1.2 - Follows market with slight amplification
Johnson & Johnson (JNJ): Beta ~0.6 - Defensive
Tesla (TSLA): Beta ~2.0 - Very volatile

Part 4: Sector Comparison

Always compare a stock to its peers in the same sector.

Benchmarks by Sector

Sector	Avg P/E	Div Yield	Volatility
Tech	25-35	0.5-1%	25-40%
Finance	12-18	2-4%	20-30%
Healthcare	18-25	1-2%	15-25%
Energy	10-15	3-5%	25-35%
Consumer	20-28	1-3%	15-25%

Analyze Sectors

Explore our detailed stock analyses:

Tech: AAPL, MSFT, GOOGL, NVDA
Finance: JPM, BAC, GS
Healthcare: JNJ, PFE, UNH

Part 5: Investor Checklist

Before buying a stock, go through this checklist:

Fundamentals

Revenue growth > 5% over 3 years
Positive and stable net margin
Reasonable debt (Debt/Equity < 1)
Positive Free Cash Flow

Valuation

P/E compared to sector
P/B consistent with business model
PEG ratio < 2 (P/E / Growth Rate)

Technical

General trend (bullish/bearish/range)
Sufficient average volume (liquidity)
No major RSI divergence

Risk

Acceptable volatility for your profile
Beta understood and consistent with strategy
Correlation with existing portfolio

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Data Sources

Yahoo Finance (free)
TradingView (technical)
SEC EDGAR (US financial reports)
Morningstar (qualitative analysis)

Conclusion

Analyzing a stock requires method and patience. Combine:

Fundamental analysis to evaluate company quality
Valuation ratios to avoid overpaying
Technical analysis to optimize entry points
Risk management to protect your capital

Pro tip: Start with companies you understand. Warren Buffett only invests in what he fully understands.

Last updated: January 2026