Crunching the numbers

Q When reviewing the financial statements of a company I’d like to invest in, what are some numbers to look at?—

F.L., Worcester, Massachusetts A Evaluating a company closely before investing in it — by assessing and crunching numbers from its main financial statements (the balance sheet, income statement and statement of cash flows) — is a smart move.

On the balance sheet, little or no debt is good. Also check that inventory levels and accounts receivable are growing no faster than sales. On the statement of cash flows, you’ll generally want to see that most of the company’s cash comes from ongoing operations — products or services sold — and not from, say, the issuance of debt or stock, or the sale of assets. Positive and growing free cash flow is promising, too.

Strong profit margins (gross, operating and net) can be a sign of a high-quality company, reflecting proprietary brands or technology it can charge more for. Check previous years’ numbers as well, to see whether margins have been rising or falling — and perhaps compare them with those of competitors. You can learn how to calculate these and other informative measures by looking them up online. Our “Investing Basics” nook at Fool.com is also helpful.

Q

What are some good books on value investing?

— W.P., Victoria, Texas

A

Try “The Little Book of Value Investing” by Christopher H. Browne (Wiley, $25); “Value Investing: From Graham to Buffett and Beyond” by Bruce C. Greenwald, Judd Kahn, et al. (Wiley, $35); or “The Intelligent Investor” by Benjamin Graham (Harper Business, $25). You can get a good introduction to investing in general from “One Up on Wall Street” by Peter Lynch (Simon & Schuster, $19).