Basic Stock Analysis Guide for Beginners

If you want to pick your own stocks but get lost in the financial statements, this guide’s for you. It won’t turn you into Warren Buffett overnight, but it will give you the tools to skim financials and decide if a company is worth digging deeper into.

I usually start by going through the stocks that are within 15% of their 52wk high. Help’s you find companies that already have momentum going for them, and if it is a microcap, it could just be the beginning. Once I pick the stock, I take a peek at the state of their chart, if it isn’t abysmal, I would then move on to a brief run through of their financials.

Basic Analysis & Key financial terms and ratios to understand:

Step 1: Income Statement

When I’m looking at a stock, the first thing I check is revenue growth. It’s the simplest way to tell if the company is actually expanding. If revenue is growing 20% or more quarter-over-quarter, that’s usually a sign the business has momentum. Even better if the growth rate itself is climbing, for example 15% → 25% → 40%. That shows the company is scaling and doing it efficiently.

After revenue, I move to the gross margin, which shows how efficiently the company produces its goods or services. The formula is:

(Revenue - Cost of Goods Sold (COGS) / Revenue) x 100

It essentially shows how much money is left from each dollar of revenue after covering the direct costs of production. Gross margin is useful when comparing to competitors and also just understanding if their manufacturing costs etc, are getting cheaper over time. If it is increasing then that is a green flag.

From there, I check operating expenses. These include R&D, marketing, salaries, and admin. In other words, the costs of running the business that are not tied directly to production. What I want to see is expenses growing slower than revenue, because that means the company is scaling efficiently. On the flip side, if expenses are rising faster than revenue, it could hint at inefficiencies or poor cost management.

Next, I take a quick look at the interest expense. This is the amount the company is paying to service its debt. While I’ll do a deeper dive into debt when I analyze the balance sheet, it’s helpful to glance at this number here to see if debt costs are eating into profitability. It is also useful to judge in comparison to the cash number, you can take the company’s cash and divide it by the periods interest expense to see how many periods (quarters or years, depending on the financials) the company could cover its interest payments with the cash it currently has.

Finally, I look at EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric strips out certain non-operational or non-cash expenses (shit that’s listed as an expense on the financials but don’t actually reduce the company’s cash position) to give a clearer picture of the company’s operating performance. Here’s why it’s important:

Interest: Excluded because financing costs vary depending on how the company is funded.

Taxes: Excluded because tax rates can differ significantly between regions or periods.

Depreciation and Amortization: These are non-cash expenses (accounting for the wear and tear of assets), so they don’t affect actual cash flow.

Basically, by focusing on EBITDA, you can see how profitable the company’s core operations are, without being distracted by financing or accounting decisions. And once again here I’d be looking if it is growing and how quickly.

Step 2: Balance Sheet

After the income statement, I move on to the balance sheet. This is where I check how tight the company is running and whether they have the stability to support their operations.

The first thing I look at is cash. I want to know how much they have on hand right now.

Next, I check liquidity, which tells me if the company can handle its short-term obligations. The quick way to do this is by looking at the current ratio:

Current Ratio = Current Assets ÷ Current Liabilities

Current assets include things like cash, receivables, and inventory. Current liabilities are short-term debt and accounts payable. On the balance sheet you’ll see both lines listed, so I usually just eyeball them and see if they’re at least even. A ratio above 1 means they can cover their short-term debt. I like to see something closer to 1.5 or higher because that gives them a cushion. If the ratio is too low, it’s a sign they could struggle to meet obligations.

Next, I look at their debt levels. It’s not just about how much debt they have but whether it’s increasing or decreasing. A company taking on a lot of debt without growing revenue or profitability to match could be a red flag. I also keep an eye on their ability to manage the debt. This is an important thing to check because debt can be deceiving as it could look like high growth on the surface except that growth is fueled by borrowed money, which isn’t sustainable if the company can’t generate enough cash flow to pay it back. If revenue or profitability doesn’t keep pace with the growing debt, it can quickly become a problem, especially if interest payments start eating into their earnings. As mentioned, I either wanna see the debt decreasing, or at least growing slower then revenue.

Finally, I check shares outstanding. This shows me if the company has been issuing a lot of new shares. If the number of shares outstanding is growing rapidly, it can dilute existing shareholders, which isn’t great. It’s a sign they might be relying too much on raising money from investors instead of generating cash through their business. For me, stable or slowly growing shares are much better.

Step 3: Cash Flow Statement

The cash flow statement is something I’ll dig into more if I’m doing a deeper analysis, but when I’m just skimming, there are two key things I’ll check: capital expenditures and free cash flow.

Capital expenditures (CapEx) are what the company spends on big investments like equipment, property, or technology. These are important for growth, but if CapEx is too high without the cash flow to support it, that can become a problem. I usually just glance here to see how much they’re reinvesting back into the business.

The other thing I’ll look at is free cash flow (FCF). This is basically the cash a company has left over after paying for operating expenses and capital expenditures.

Free cash flow matters because it shows how much actual cash the company has available to pay down debt, return money to shareholders, or fund more growth. If free cash flow is consistently growing, that’s a great sign the business is in good shape and has flexibility. If it’s negative or shrinking, it usually means they’re burning through cash faster than they’re making it.

Burn Rate

The burn rate is a key metric for companies that aren’t profitable yet, especially in sectors like junior mining. It shows how much cash a company is spending each month just to keep operations running.

To calculate it, you take the company’s total cash and divide it by their average monthly operating expenses.

Here’s a quick way to estimate:

Take the operating expenses from the last two quarters (found on the income statement).

Add them together and divide by six to get the average monthly expense.

Divide the company’s cash balance by that monthly number.

Example:

If a company has $5 million in cash and $3 million in operating expenses over the last two quarters:

$3M ÷ 6 = $500k average monthly expense

$5M ÷ $500k = 10 months of runway

In this case, the company could keep operating for about 10 months before running out of cash.

If the burn rate is short, like under six months, it’s worth checking whether the company has plans to raise more money soon.

Past Example: TSSI

I first started talking about TSSI when it was around $1.46. It went on to run as high as $32 a share and is now sitting closer to $15.

Here were the company highlights I posted back then:

Revenue grew 142%, from $6.6M in Q1 2023 to $15.9M in Q1 2024, driven by procurement services growth.

Turned a Q1 2023 operating loss of $665K into a $253K profit in Q1 2024.

Positioned to capitalize on rising demand for AI computing solutions, increasing production capacity.

Adjusted EBITDA swung from a $436K loss to a $475K gain, while gross profit increased 61%.

The first thing that stood out was simple: clear, strong growth in both revenue and EBITDA. On top of that, the company had just turned profitable. I love finding companies that are crossing into profitability for the first time, especially when they’re in a scalable space like tech.

TSSI provides data center services, which meant this was basically a play on the AI boom without the same risks you’d take by betting on early-stage AI startups. Instead of gambling on companies with little revenue and a tiny chance of surviving, I chose to invest in the infrastructure powering the AI trend.

The setup was straightforward. Strong growth, a huge narrative tailwind, and the company flipping to profitability. Sometimes investing really is that simple.

Final Thoughts

This guide isn’t meant to cover every ratio or every angle of stock analysis. It’s meant to give beginners a way to skim through financials without feeling overwhelmed. If you can spot revenue growth, improving margins, manageable debt, and healthy cash flow, you’ll already be ahead of most people. From there you can always dig deeper, but this is a solid starting point for deciding whether a stock deserves more of your time.

Happy hunting!