Investing in stocks can be one of the best decisions to grow your wealth, but it can also turn into a headache if you buy without checking the company’s financial health. Many investors get carried away by trends, social media chatter, or tips from friends, and end up buying overvalued stocks that later drop in price.
The good news is you don’t need to be an expert or pay for expensive investment bank reports to do a solid initial analysis. With free tools like TradingView, you can review three fundamental data points before deciding whether to invest. And if you want to go a step further, you can use Seeking Alpha to see what Wall Street analysts think about the stock’s future.
Below, I explain, step by step, what to check, what each element means, and the insight it gives you.
1. Price-to-Earnings Ratio (P/E)
What it is: The P/E compares the stock’s current price with the company’s annual earnings per share (EPS).
Formula: Share price ÷ Earnings per share.
How to read it:
- Low P/E (<20): The stock may be undervalued—i.e., cheap relative to its earnings.
- High P/E (>20): Could indicate overvaluation, or that the market expects strong growth.
Insight: The P/E helps you judge whether you’re paying a reasonable price for each dollar of earnings. However, a low P/E can also indicate that the company is facing issues, so it’s best to consider it in conjunction with the indicators below.
2. Revenue Growth and Net Margin
What they are:
- Revenue: The company’s total sales.
- Net margin: The percentage of revenue that remains as profit after all expenses.
How to read it:
- Revenue rising year over year: The company is selling more or gaining market share.
- Net margin increasing: The company is more efficient—earning more per dollar sold.
Insight: A solid company grows sales and, at the same time, improves profitability. If revenue is rising but margins are falling, growth may be unsustainable. Ideally, you want both curves trending up.
3. Financial Position (Equity vs. Debt)
What it is: The balance sheet shows owners’ equity (capital) versus obligations (debt).
How to read it:
- Equity > Debt: Financially sound; less dependent on borrowing.
- Debt > Equity: Potential solvency issues if revenue declines.
Insight: A company with no debt isn’t automatically better. Many firms use debt to grow. What matters is that debt is manageable and equity remains the larger base.
4. The Wall Street Trick: Analyst Opinions (Seeking Alpha)
In addition to TradingView, you can use Seeking Alpha to see what Wall Street analysts think about a stock.
How to do it:
- Look up the stock on Seeking Alpha.
- Go to Wall Street Analysts’ Rating.
- Note the current price and compare it with the analysts’ average price target.
Example: If Mercado Libre trades at $1,800 and analysts project $2,846, that suggests a positive consensus about its growth.
Insight: It’s not a guarantee, but it’s a useful reference. It helps you contrast your own analysis with experts’ views.
Practical Case: Mercado Libre
- On TradingView, we verify that its P/E is within a reasonable range compared with other e-commerce companies.
- We check that its revenue is growing consistently and its net margin has strengthened.
- We confirm on the balance sheet that equity exceeds debt.
- On Seeking Alpha, we see most analysts project a higher price in the near future.
With these steps, you get a clear, well-founded view to decide whether to invest.
Pre-Investment Checklist
- Review the P/E ratio.
- Confirm revenue and net margin grow each year.
- Verify equity is greater than debt.
- Complement with analyst opinions on Seeking Alpha.
By applying this method, you reduce the risk of buying overvalued stocks and increase the chance of finding long-term growth opportunities.
Limitations of This Analysis
It’s important to note that this method relies mainly on quantitative data (financial ratios, margins, balance sheets, and market projections). This amounts to a technical analysis of financial information, but it does not include other qualitative factors that also determine a company’s success, such as:
- Quality of the management and leadership team.
- Capacity for innovation and new product development.
- Brand reputation in the market.
- Corporate culture and talent management.
- Competitive landscape and regulatory changes.
Therefore, consider this analysis a first, objective filter—ideally complemented by a deeper study of qualitative factors to get a holistic view before investing.