The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

Has the Firm Sold a Business or an Asset Recently? When you’re looking at a P/E ratio, you must be sure that the E makes sense. If a firm has recently sold off a business or perhaps a stake in another firm, it’s going to have an artificially inflated E, and thus a lower P/E.

Going against the grain takes courage, but that courage pays off. You’ll do better as an investor if you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavor of the month in the financial press.

The nice thing about P/E is that accounting earnings are a much better proxy for cash flow than sales, and they’re…

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basics of valuation—the three big factors that affect value are the amount, timing, and riskiness of a firm’s future cash flows.

Does Management Use Stock Options Excessively? Even if they’re distributed beyond the executive suite, giving out too many options dilutes existing shareholders’ equity. If a company gives out more than 1 or 2 percent of the outstanding shares each year, they’re giving away too much of the firm’s equity every year. Conversely, it’s a great sign if

The goal of any investor should be to buy stocks for less than they’re really worth. Unfortunately, it’s easy for estimates of a stock’s value to be too optimistic—the future has a nasty way of turning out worse than expected. We can compensate for this all-too-human tendency by buying stocks only when they’re trading for substantially less than ou

everything gets neatly netted out for you in the “net cash provided by operating activities” line.

This is an important number to look at because it indicates how a company is financing its activities. Rapidly growing companies often issue large amounts of new stock, which can dilute the value of existing shares but which also give the company cash for expansion. Slower growing companies that generate a lot of free cash flow tend to buy back sig

watch the “allowance for doubtful accounts,” which is essentially the company’s estimate of how much money it won’t be able to collect from deadbeat customers. If this amount doesn’t move up in sync with A/R, the company may be artificially boosting its results