When it comes to financial due diligence, it all begins with the company’s financial statements. You
could find these financial statements in the “Investor Relations” section on a publicly-traded company’s website. Additionally, there are websites such as Finviz, Morningstar, and Yahoo Finance that
house this information as well.
If you choose to use a third-party website for the financials, make sure to double check they’re in line
with what the company reports.
Now, when it comes to financial analysis, I think there are some key questions to ask yourself about
the company:
• What’s the company’s historical performance?
• What’s the performance of the sector?
• Are the company’s financials healthy?
• Does the company generate earnings and free cash flow?
• How well does the company manage its debt (if any)?
• What are the company’s revenue streams?
Of course, financial statement analysis can be an entire book on its own. However, I want to provide
you with some quick notes about analyzing a company’s financials.
I believe there are three important financial statements investors may want to look into:
• Balance sheet
• Income statement
• Cash flow statement
The other two are the stockholders’ equity statement and the statement of comprehensive income
(which won’t be covered here because this isn’t a book about accounting).

Why It’s Important To Use Financial Ratios

You could find these financial statements in the “Investor Relations” section on a publicly-traded company’s website. Additionally, there are websites such as Finviz, Morningstar, and Yahoo Finance that
house this information as well.
If you choose to use a third-party website for the financials, make sure to double check they’re in line
with what the company reports.
Now, when it comes to financial analysis, I think there are some key questions to ask yourself about
the company:
• What’s the company’s historical performance?
• What’s the performance of the sector?
• Are the company’s financials healthy?
• Does the company generate earnings and free cash flow?
• How well does the company manage its debt (if any)?
• What are the company’s revenue streams?
Of course, financial statement analysis can be an entire book on its own. However, I want to provide
you with some quick notes about analyzing a company’s financials.
I believe there are three important financial statements investors may want to look into:
• Balance sheet
• Income statement
• Cash flow statement
The other two are the stockholders’ equity statement and the statement of comprehensive income
(which won’t be covered here because this isn’t a book about accounting)


If you don’t already know, some of the greatest investors in history use financial ratios to analyze
companies, such as Warren Buffett.
So what are financial ratios?
Well, they provide actionable information about a company. The best part here is that all of this information is public and can be found in the financial statements, you would just need to know how to
calculate and interpret the ratios.
Financial ratios are typically grouped into 5 categories:
• Market value ratios
• Liquidity ratios
• Efficiency ratios
• Leverage ratios
• Profitability ratios
Of course, I don’t believe there’s a one-size fits all ratio, so it’s important to analyze ratios from these
categories. When it comes to financial ratios, investors typically use them to compare a stock with its
peers, the overall industry or sector, and the changes in the financial ratio over time, to name a few.
Now, I won’t bore you with all the nuances of these ratios, but I believe it’s important to know how to
calculate and interpret a few key ratios. For me personally, I don’t necessarily look at all the financial
ratios out there, just the ones that I find are important.
Key Ratios To Keep In Your Back Pocket
These ratios are important to investors because it directly impact the return on investment and could
potentially uncover investment opportunities. The first financial ratio is Earnings Per Share (EPS),
this can typically be found on the income statement. This is an indication of a company’s profitability.
For the most part, a strong company will be able to grow its EPS over time. Keep in mind, companies may
buy back shares of their stock to reduce the number of shares outstanding to artificially boost EPS. That
said, make sure to stay up to date of any corporate actions, namely buyqbacks if you want to use this ratio.

The dividend payout ratio is another important financial metric. For companies that pay dividends to
shareholders, it’s important to know how much of a company’s net income is distributed in dividends.
This ratio is calculated by dividing the dividends over a specified period by the net income for the
same period. If a company’s dividend payout ratio continues to rise over time, and reaches more than
100%, it should definitely throw up some red flags.
Dividend yield indicates how much a company pays out in the form of dividends in relation to its
share price at a specific point in time.
Debt ratio is calculated as the total liabilities divided by total assets. If a large portion of a company’s total assets is made up of liabilities (debt), it may be an indication the company is not financially
sound. However, keep in mind, one ratio does not paint the entire picture of a company.
Debt to equity ratio measures a company’s financial leverage. Basically, it tells us how much debt a
company is using at a specific time to finance its debt, relative to its shareholders’ equity.
Gross profit margin gives us an indication of how profitable a company is… the higher the figure the
better. This ratio tells us the percentage of total revenue that actually became a profit for the company.
Of course, the list goes on and on for financial ratios. However, I believe these ratios can be sufficient
to conduct due diligence for my portfolio. Of course, if you’re interested in financial ratios, by all
means feel free to research the financial ratios because that can potentially help you become a better
investor.
There are other factors that go into my decision-making process, such as technical analysis and other
fundamentals.
The thing is, I can continue to bore you with the details of financial statements, all the financial ratios,
and go through different chart patterns. However, I don’t think it will benefit you a whole lot. Instead,
I want to show you how I find potential investment opportunities and analyze them.
But first, I want to show you how to build a portfolio for generations to come.