5 Simple Metrics to Spot a Winning Stock Before You Buy

Ever see a stock you really like and wonder, “Is this a winner?”

Picking the right stock can feel tricky, but it doesn’t have to be!

Before you buy, there are five easy things you can check about a company to decide if it’s a “green light” (go for it!) or a “red light” (maybe skip it). These are like clues that tell you if a company is strong and worth your money. Let’s break them down in a super simple way, so you can feel confident picking stocks for your Theta Trading journey!

1. Strength of Revenue: Is the Company Making Money?

What is it? Revenue is the money a company gets from selling stuff, like toys, phones, or food. It’s like the cash they collect from customers. Strong revenue means they’re selling a lot and growing.

Why check it? A company with growing revenue is like a popular lemonade stand that keeps getting more customers. If their sales are going up every year, it’s a good sign they’re doing something right. But if their revenue is shrinking, it’s a red light—they might be losing customers.

How to check it? Look at the company’s “sales” or “revenue” in their reports (you can find these on their website or places like Yahoo Finance). Compare this year’s revenue to last year’s. Is it bigger? Green light! Is it smaller? Red light.

Example: If a company like Apple sells $100 billion in iPhones this year, up from $90 billion last year, that’s a green light. But if a store’s sales drop from $10 million to $8 million, that’s a red light.

2. Quality of Earnings: Is Their Money Real?

What is it? Earnings are the profit a company keeps after paying all its bills, like rent or supplies. Quality of earnings means checking if that profit is honest and steady, not fake or from weird tricks.

Why check it? Think of earnings like your allowance after buying snacks. If a company’s profit comes from selling products, that’s awesome—green light! But if they’re just selling old stuff or playing accounting games to look good, that’s a red light. You want real, dependable profits.

How to check it? Look at their “net income” in reports. Then, see where it comes from. Is it from their main business, like selling clothes? Good! Is it from one-time things, like selling a building? Not so good. Steady profits over a few years are a green light.

Example: If a toy company makes $5 million profit from selling dolls, that’s a green light. But if they made $5 million by selling their old factory, that’s a red light—it won’t happen again.

3. Liquidity: Do They Have Enough Cash Handy?

What is it? Liquidity is how much cash (or stuff they can quickly turn into cash) a company has to pay bills, like salaries or electricity. It’s like having enough money in your piggy bank for emergencies.

Why check it? A company with lots of cash is ready for surprises, like a sudden repair. That’s a green light—they’re safe. But if they’re low on cash, they might struggle to pay bills, which is a red light. You want a company that’s not broke.

How to check it? Look for their “current assets” (cash, things they can sell fast) and “current liabilities” (bills due soon) in reports. If assets are way bigger than liabilities, green light! If they’re close or liabilities are bigger, red light.

Example: If a coffee shop has $1 million in cash but only $200,000 in bills, that’s a green light. If they have $100,000 in cash but $150,000 in bills, that’s a red light—they’re short.

4. Debt Load: Are They Borrowing Too Much?

What is it? Debt load is how much money a company owes, like loans from a bank. It’s like if you borrowed money from your parents and have to pay it back.

Why check it? A little debt is okay, like borrowing for a new store that makes money. That’s a green light. But too much debt is bad—they might struggle to pay it back, which is a red light. You want a company that can handle its loans easily.

How to check it? Find their “total debt” and compare it to their “equity” (what they own after paying debts) in reports. If debt is small compared to equity, green light. If debt is huge, red light. Also, check if their profits cover debt payments—look for “interest coverage ratio” (higher is better).

Example: If a car company owes $1 million but has $5 million in profits, that’s a green light. If they owe $10 million and only make $1 million, that’s a red light—they’re drowning in debt.

5. Statement of Cash Flows: Where’s Their Money Going?

What is it? The statement of cash flows shows how a company’s cash moves—like how much they get from sales, spend on new stuff, or use to pay loans. It’s like tracking your spending to see if you’re saving or wasting money.

Why check it? A company with lots of cash from selling products is strong—green light! But if they’re spending too much or not making enough cash, that’s a red light. You want a company that’s good at keeping cash coming in.

How to check it? Look at their “cash flow statement” in reports. Check “operating cash flow” (cash from their main business). If it’s positive and growing, green light. If it’s negative or shrinking, red light. Also, see if they’re spending cash wisely, like on new products, not just paying old debts.

Example: If a shoe company makes $2 million in cash from selling sneakers, that’s a green light. If they’re losing $1 million in cash and borrowing to stay alive, that’s a red light.

Why These Metrics Matter for Theta Trading

Knowing these five things—revenue, earnings, liquidity, debt, and cash flow—helps you pick stocks that are strong and ready to grow. If a company gets green lights on most of these, it’s a great choice to move to the next step, like learning options strategies with Theta Trading. Red lights? Maybe skip it and find a better stock. At Theta Trading, we teach you how to use these clues to make smart trades, with support from our community