Due Diligence

Q If I’m drawn to a young and growing company, what should I look into before investing in it? — T.S., Bradenton, Florida A First, make sure the company has competitive advantages. These might include a strong brand, a solid reputation, valuable patents or economies of scale.

Check out the financial statements it has filed with the Securities and Exchange Commission

(SEC.gov/edgar.shtml). Its income statement should feature growing sales (sometimes called revenue) and income. On its balance sheet, figures for inventory or accounts receivable should not be growing faster than sales. Heavy or quickly growing debt are additional red flags.

Look at the company’s statement of cash flows to see how it’s generating cash. Ideally, most cash should come from ongoing operations — the making and selling of products or services — and not from issuing debt or stock or selling property.

Examine the company’s profit margins (gross, operating and net). Higher margins suggest that it has a strong brand or special technology it can charge more for. Ideally, profit margins should be growing over time — or at least not shrinking.

Finally, assess how attractive the price is; while a company may be terrific and promising, you don’t want to overpay for its shares. Comparing its price-to-earnings (P/E) ratio or price-to-sales ratio to its five-year average — which you can find at Morningstar.

com — will give you a sense of how its valuation has been changing over time. (Enter the company’s ticker symbol and then click on the “Valuation” tab.)

You can learn much more about how to evaluate companies at Fool.com.

Q How can I access my credit report? — F.R., Riverside, California A Visit AnnualCreditReport.com, where you can get free copies annually.

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