Troubled stock can bring you high profit. However, investing this stock is very risky. Troubled company can correct them self or can go into bankrupt. Therefore, before you invest in this stock, you need to analyze the company:

1. Assess company’s performance from its income statement, cash flow statement, and debt-to-equity ratio. An increasing profit may show signs of improvement. An increasing debt-to-equity ratio means that the company has higher risk than before. The company might try to solve their problem by borrow more debt, which is dangerous. They can get deeper into trouble.
2. Does the company have good management? Do they have great competitive advantage? If yes, then the company has high probability to overcome their problem. 
3. Check the company probability for going into bankrupt. Edward Altman developed a Z-score model based on financial ratios to predict whether a company will go into bankrupt or not.

Tags: cash flow, debt to equity, Financial Ratios, income statement, Z-score

Financial ratio can tell a lot about a company. You can see how much they make profit, or how healthy they are. Financial ratio can help making decision in picking a stock. To know whether a company is healthy or not, you can check their current ratio (current assets / current liabilities), debt ratio (total debt/total assets), and debt to equity ratio (total debt / total equity). To know the performance of making profit, check the Return on Asset (ROA = Net Income / total assets) and Return on Equity (ROE = Net Income / total equity). Another important ratio is Earning per Share (Net Income / total outstanding shares), Price/Earning ratio (P/E = market price per share / earning per share), and price/book value ratio (market price per share / book value per share). The higher the current ratio, ROE, ROA is better. The lower the debt ratio and debt to equity ratio is better. Low P/E and price/book value ratio means the stock is cheap. Cheap stock means that it has poor performance or people didn’t realized that the company is good. To make decision on which stock you should buy, compare financial ratios between each company in the same sector / business.

Tags: current assets, current liabilities, Financial Ratios, P/E, ROA