How to Research a Company Before Investing: A Step-by-Step Guide
A practical framework for researching stocks using SEC filings, financial analysis, and competitive research. No expensive tools required.
Buying a stock takes a couple of taps. Understanding what you just bought takes work.
I used to skip this work. I'd see a name mentioned somewhere, the chart looked reasonable, and I'd buy. Sometimes it worked out. More often, I found myself holding something I couldn't explain and had no real thesis for when it moved against me.
Real investing means treating a stock as a claim on a real business. That means knowing what the company actually does, how it's performed, what could break, who runs it, and whether the price makes sense given all of that.
The good news: you don't need a terminal or expensive data feed. Public companies are forced to disclose a lot for free. The bad news: it's scattered across filings and websites, which can feel overwhelming without a path.
This is the process I've settled on. It's not about building the perfect model. It's about stopping myself from buying things I don't understand.
My Research Framework
I've boiled my process down to five questions:
- What does this company actually do?
- How has it performed financially?
- What can realistically go wrong?
- Who owns it, runs it, and gets paid by it?
- Given all that, is today's price reasonable?
I move through them in order. If I get stuck on question one, I don't skip ahead to valuation and hope for the best. That path leads to bad decisions.
Step 1: Understand the Business Model
I start with the real world, not the spreadsheet. Before looking at any ratios, I want a plain answer to:
- What does this company sell?
- Who pays them, and why?
- How does the money actually come in?
The place to learn this is the company's filings, not its marketing. The 10-K annual report is my primary source. Item 1, "Business," is a solid primer. It lays out products and services, how operations are organized, main markets, and which trends and regulations matter. It's not thrilling prose, but it's written under legal constraint. That makes it more honest than the homepage.
I layer on investor presentations and earnings call transcripts after reading the boring stuff. Presentations show how management pitches the story. Transcripts let me hear how that story sounds under questioning.
What I'm trying to form is a mental model of the flywheel: what drives demand, what drives pricing, what drives cost, and what stops competitors from copying all of that. If I can only describe the business as "some kind of platform" or "AI something something," I'm probably not ready to risk money.
A concrete example: Costco. When I read their filings, I realized the core of the business isn't "selling cheap stuff in big boxes." The core is selling memberships. The warehouse clubs almost function as a break-even operation designed to keep those memberships renewing. Once I grasped that, the way they price, staff, and expand made a lot more sense.
That kind of "oh, that's the real engine" insight is what I'm hunting for in Step 1.
Step 2: Look at Financial Performance Over Time
Once I think I understand how the machine is supposed to work, I check the gauges. The goal isn't to memorize line items but to see whether the numbers match the story.
Public companies report three main statements in the 10-K and 10-Q:
- An income statement showing how much they sold and what was left after expenses.
- A balance sheet showing what they own and owe at a point in time.
- A cash flow statement showing where actual cash came from and went.
I start with direction and consistency. Has revenue grown over the last five years, or bounced around? Are gross and operating margins stable, expanding, or shrinking? Is there a pattern of "grew, then crashed, then grew again," or something more boring and steady?
Then I look at how earnings and cash flow behave together. Healthy businesses tend to show earnings and operating cash flow moving roughly in the same direction over time. When reported net income is climbing but operating cash flow is flat or negative, I pause and ask why. Maybe there's a legitimate reason. Maybe they're recognizing revenue aggressively and cash isn't following.
The balance sheet tells me about survivability. How much cash is on hand? How much debt? When does that debt mature? A mediocre company with a clean balance sheet has time to fix itself. A decent company buried in short-term debt can get crushed by a mild downturn.
I don't turn all this into an elaborate model for most situations. It's enough to say: this company has grown revenues at roughly this pace, maintained roughly these margins, consistently generated or burned this much free cash flow, and carries this much debt. If that picture doesn't line up with the story from Step 1, I take the dissonance seriously.
Step 3: Take Risks Seriously
Every investment pitch can sound compelling if you only talk about upside. The point of reading risk disclosures isn't to freak yourself out. It's to decide whether the potential downsides are ones you can live with at the current price.
The most concentrated list of risks lives in Item 1A of the 10-K, "Risk Factors." It will be long. Parts will be boilerplate. Still, I've found it worth a slow read, especially when I compare it to the same section from the previous year.
What I'm looking for is change and specificity.
If a risk appears for the first time this year, or an old generic risk suddenly gets its own expanded paragraph with actual numbers or named counterparties, that's a clue. A vague "we operate in a competitive marketplace" is one thing. "We derive 30% of revenue from one customer and they are renegotiating their contract" is something else entirely.
I try to bucket what I read. Some issues are structural business risks (new technology that could make the product obsolete). Some are financial risks (debt covenants, interest rate exposure, capital markets dependence). Others are external (regulation, macro conditions, FX, geopolitics).
Then I tie each risk back to the numbers. If a company warns about losing a key supplier, I think about how that would show up in margins, inventory, and revenue. If it mentions regulatory changes, I think about what line items get affected.
The aim isn't to talk myself out of every idea. It's to stop being surprised by risks that were already spelled out in black and white.
Step 4: Check Who Else Has Skin in the Game
A company is a set of contracts and incentives, not just a pile of assets. Even a decent business can be a bad investment if the wrong people are in charge or paid in the wrong way.
There are a few groups I care about.
Insiders. Executives and directors. The 10-K and proxy statement tell me how much stock they own. Form 4 filings (which you can see in real time in Earnings Feed's insider hub) tell me when they buy or sell. I don't turn this into a quant strategy, but I want a rough sense of whether leadership has real skin in the game or is simply collecting cash and options.
Institutional holders. Large owners file 13Fs that reveal their public equity positions. I'll often see a split between long-only asset managers, hedge funds, index funds, and smaller players. A name held primarily by patient, fundamental investors tends to trade differently than one dominated by short-term hot money. Neither is automatically good or bad; it just shapes how the stock might behave when news hits.
Board and compensation. Reading about the board in the 10-K and the compensation section in the proxy is tedious, but it clues me into whether executives are rewarded for building durable value or just hitting short-term metrics. Are bonuses tied to earnings per share and return on capital, or to raw revenue regardless of profitability? Are stock awards vesting over sensible horizons, or constantly reset when targets are missed?
I don't need to love every aspect of how the board runs things to invest. I do want to know if I'm signing up for a partnership with disciplined stewards or something more casual.
Step 5: Ask Whether the Price Is Actually Fair
Only after I've understood the business, looked at performance, examined risks, and checked incentives does it make sense to talk about valuation.
Valuation is about mapping "this is the quality and growth of the business" to "this is how many years of earnings or cash flow I'm being asked to pay for." I can approach that with simple multiples, detailed cash flow estimates, or some hybrid.
Multiples are the easiest starting point. I look at price-to-earnings, enterprise-value-to-EBITDA, price-to-sales, and free cash flow yield. Then I compare:
- To direct competitors.
- To the company's historical average.
- To the broader market, with an eye on growth and risk.
A company that grows slowly, is cyclical, and carries a lot of debt shouldn't trade at the same multiple as one that grows predictably, throws off cash, and has a clean balance sheet. When I see a big gap, I ask whether it's justified.
If I'm comfortable building a simple cash flow model, I'll project rough paths for revenue, margins, and capital spending, translate that into free cash flow, and discount it back. I'll be wrong in the details. The point isn't precision. It's to see whether even generous assumptions barely justify the current price, or whether the market's expectations are modest relative to what I think is likely.
Whatever approach I use, I bake in a margin of safety: some cushion between my estimate of fair value and the current market price. That gap protects me when my assumptions turn out to be too rosy. And occasionally, they will be.
Putting the Pieces Together
After running through the five steps, I force myself to write down my conclusion as if explaining the idea to someone who's about to copy me.
In a paragraph or two, I should be able to describe what the company does, why that model works, what the numbers look like over time, which specific risks I'm taking, how management and owners are aligned (or not), and why today's price offers enough upside to justify tying up my capital.
That little write-up matters more than it sounds. It turns a hazy impression into something I can later revisit and challenge. When the stock moves up or down, I can compare reality to what I wrote instead of improvising a story after the fact.
Not every name graduates to a full position. Some will clearly be "pass" after I do the work. Others will be "interesting, but too expensive for now," which I park on a watchlist and revisit if the price or story changes. A much smaller subset will emerge as "I understand this, I like the trajectory, I'm comfortable with the risks, and I think the market is mispricing it." Those are the ones worth serious capital.
How Deep to Go
I don't spend a weekend modeling a $300 punt. I probably should spend real time on something that's going to be 10% of my portfolio.
I think of three rough levels:
- Quick screen: Skim the business description, glance at a few years of basic financials, read the most recent risk factors, and decide whether the name even deserves more time.
- Standard pass: Read the latest 10-K properly, look at multi-year trends, scan recent 8-Ks for significant events, check insider activity, and do a simple valuation cross-check.
- Full analysis: Read several years of 10-Ks, multiple quarters of 10-Qs and transcripts, go through all recent 8-Ks, build a basic model, and write a full thesis memo including what would make me change my mind.
I can absolutely start small. Maybe I only ever do the first two levels. The important thing is having levels and being honest with myself about how much work I've actually done for a given position size.
Quick Reference: The Five Questions
Before I buy, I should be able to answer all five:
| # | Question | Where to Find It |
|---|---|---|
| 1 | What does this company actually do? | 10-K Item 1 (Business), investor presentations |
| 2 | How has it performed financially? | 10-K/10-Q financials, cash flow statement |
| 3 | What can realistically go wrong? | 10-K Item 1A (Risk Factors), compare to prior year |
| 4 | Who owns it, runs it, and gets paid? | Proxy (DEF 14A), Form 4s, 13F filings |
| 5 | Is today's price reasonable? | Multiples vs. peers and history, simple DCF sanity check |
If I can't clearly answer one of these, that's where I need to spend more time. Or I need to accept I'm speculating, not investing.
Running This Process with Free Tools
All of this is doable with public information:
- SEC filings (10-K, 10-Q, 8-K, proxy) give me the business description, financials, risk factors, board oversight, and pay plans. I access them through SEC EDGAR or via a more usable front-end like Earnings Feed, which also shows new filings in real time.
- Insider activity (Form 4) shows what executives and directors are doing with their own stock. Earnings Feed's insider hub makes this easy to track.
- Basic financial data and charts from mainstream finance sites help me cross-check my own calculations and see valuation at a glance.
- Earnings call transcripts and investor presentations, usually available for free, give me the tone and nuance around the numbers.
I don't chase more data until I'm actually wringing insight out of what's already free.
Getting Started
The easiest way to make this real is to pick one company you already know, maybe a product you use every week, and walk through the five questions properly.
If you want the filings to come to you instead of hunting them down:
- Create a free Earnings Feed account and add that company (and any others you care about) to a watchlist.
- Use the live filings feed to grab the latest 10-K, 10-Q, and 8-Ks.
- When you're curious what insiders are doing, check the insider trading section for recent Form 4s.
Then sit down with a notebook or a doc and write out your answers: what the business is, what the numbers say, what could go wrong, who's involved, and whether the current price makes sense. That's the whole game. Everything else is just scale and repetition.