Investors want foresight into a company's future. History and ratio analysis provide information on recent and current finances. Competition and economic climate puts a company's record in perspective. Future prospects are estimated from quantitative and qualitative factors.

Business History

A track record of success is more assuring to investors than a new venture. Newer enterprises are usually correlated with higher risk.

Ratio Analysis

Price-to-earnings (P/E) and other ratios are used for a comprehensive financial health snapshot. For instance, high P/E indicates either an overvalued company due for a downward correction, or that the business has unusually bright prospects. Further research can narrow down which analysis is correct.

Competition Analysis

Consider that the A&P Store was a dominant food and retail company in the first half of the 20th century, on par with today's super-sized corporations. It was eventually undone by Walmart, which faces a similar situation in light of Amazon.com's rise.

Systemic Economic Factors

A business may be well-run, but external economic trends may make it a bad investment. Similarly, a mediocre enterprise can capitalize on luck such as prime location.

Future Prospects

Numeric dimensions of a business, such as ratios and projections, as well as qualitative factors (manager whims or CEO style) are often considered in deciding whether, and how much, to invest.

Source:

"Basic Economics: A Common Sense Guide to the Economy". By Thomas Sowell, 2007

Brandeis University. "Fundamental Analysis and Stocks"

Winthrop University. "Introduction to Financial Statement Analysis"

Resource:

Mesa Community College. "Financial Position Analysis"

"Small Business Primer: How to Buy, Sell, and Evaluate a Business". Samuel S. Tuttle, 2002

Ashley M. Heher, Associated Press . "Wal-Mart and Amazon.com Trade Price Cuts on Books."