7 Questions to Ask Before Buying Any Stock (No Finance Degree Needed)

Here are the seven questions to ask before buying a stock:

1. What does it sell, and who pays?
2. How does it make its profit?
3. Is it growing, and from where?
4. Does profit turn into cash?
5. What could break it?
6. Who runs it, and do they own shares?
7. What does the price assume, and when would you sell?

Ask question 2 of Costco and you get a surprise: its membership fees were 2% of its revenue last year, but equal to 51% of its operating profit. Below, we answer all seven on Costco from its latest annual report, with where each answer sits, how long it takes to find (about an hour and a half in all) and what a worrying answer looks like.

Watch it play outMembership fees are 2% of Costco's revenue and half its profit

Costco took in $303 billion of revenue last year.

Membership fees were $5.9 billion of it: a 2% sliver.

Now operating profit, what's left after paying for the goods, the staff and the warehouses: $11.7 billion.

The same fees equal 51% of that profit.

The other 49% came from selling $297 billion of goods at under 2 cents of profit per dollar.

Replay

1. What does the company sell, and who pays for it?

Answer it in two sentences a friend would follow. If you can't, stop here, because every later number depends on knowing what drives sales.

Where to look (10 minutes): Item 1, "Business," the first few pages of the 10-K. That's the annual report every US-listed company files with the SEC. Search the company on EDGAR and open the latest one.

Costco's answer: It sells groceries, household goods, electronics and gas at low markups in 939 large warehouses, to people who pay a yearly fee to shop there. Last year that came to $297 billion of goods for 84.1 million paid memberships, or about $3,500 per membership. The basic US fee is $65 a year. Packaged food and household supplies were 39% of sales, other goods like electronics and furniture 26%, fresh food 14%, and gas, pharmacy, travel and other services 21%.

Then look at who does the buying. Half of Costco's paid members hold the pricier Executive membership, which generally pays back 2% of qualifying purchases as a reward, up to a yearly cap. That half buys about three-quarters of everything Costco sells.

Half of Costco's members buy three-quarters of its goods

• 75.2%Executive members, 42.3 million of 84.1 million paid members
• 24.8%Everyone else

Red flag at another company: one big customer making up a large slice of sales (search the 10-K for "customer" and "concentration"), or a business you can only describe in buzzwords. Costco has neither. Millions of households pay, and the 10-K says no single supplier provides a significant share of its goods.

2. How does it actually make its profit?

Find the line that produces the profit, not the one that produces the sales. They're often different, and the profit line is the one to watch.

Where to look (15 minutes): the income statement in Item 8 for the totals, then Item 7, management's discussion and analysis (MD&A), where the company explains what changed. If it has several businesses, the segment note shows profit for each.

Costco's answer: About half from fees. After paying for its goods, Costco keeps about 11 cents of each sales dollar (its gross margin, 11.09%). Wages, rent, utilities and other running costs, called SG&A (selling, general and administrative expenses), take another 9.15 cents. That leaves $5.8 billion on $297 billion of sales, under 2 cents a dollar. Add $5.9 billion of membership fees and operating profit doubles to $11.7 billion. Fees have some costs of their own that the income statement doesn't split out, so treat this as a rough split.

The goods leave $5.8 billion; membership fees double it

Net sales$297.2B

Cost of the goods−$264.3B= $33.0B

Running costs (SG&A)−$27.2B= $5.8B

Membership fees+$5.9B= $11.7B

Operating profit$11.7B

The goods are carrying more of the load than they used to. Comparing last year with the annual report from five years earlier:

For a shareholder, this tells you what to watch: both engines. The margin on goods is rising, but fees are the steadier half, renewed every year by members who have already paid. That's why the renewal rate comes back in questions 5 and 7.

It's a bad sign when profit comes from a one-off, like an asset sale, a tax benefit or a legal settlement, or when a profitable old line props up a growing new line that loses money. Our guide to 10-K red flags covers the accounting versions.

3. Is it growing, and where does the growth come from?

Yes. Costco's sales grew 10% last year, and most of the growth came from existing warehouses selling more.

Where to look (10 minutes): the "Net Sales" table in MD&A. Retailers split growth into comparable sales, from stores open more than a year, and sales from new stores. Many companies also say how much came from currency moves or price changes they don't control.

Costco's answer: Sales rose $27.3 billion. Comparable sales supplied $22.5 billion of it, growth of 8%: members shopped 3% more often and spent 5% more per trip. The 25 net new warehouses added about $4.9 billion. Two outside forces flattered the total. Higher gas prices added $3.5 billion, and currency moves added $1.3 billion. Take those out and total sales still grew about 8%, and comparable sales 7%.

One year can mislead, so check five. Costco's earnings per share (EPS), profit divided by the number of shares, grew faster than its sales:

Earnings per share outgrew sales for five years

Warehouses2.9%

Paid memberships6.4%

Membership fees8.8%

Revenue9.1%

Earnings per share13.0%

Compound annual growth over five years, comparing two 52-week years. Warehouses went from 815 to 939, paid memberships from 61.7 million to 84.1 million.

Two things explain the gap. The operating margin, operating profit as a share of revenue, rose from 3.4% to 3.9%. And the share count stayed flat, so none of the profit growth was diluted away. (CAGR, compound annual growth, smooths a bumpy path into one yearly rate.)

Be wary elsewhere of growth that comes only from raising prices, from buying other companies or from a one-time boom, or of total sales rising while the number of customers falls.

4. Does the profit turn into cash?

Yes. Costco's free cash flow, the cash left after paying for new warehouses and equipment, was $9.4 billion last year, 102% of its $9.2 billion of net income, and 93% over five years.

Where to look (10 minutes): the cash flow statement in Item 8. Take "net cash provided by operating activities" and subtract capital spending, the line for buying property and equipment. Compare the result with net income over several years, not just one. The capex and free cash flow calculator does the subtraction for you.

Costco's answer: Operations brought in $15.8 billion. Costco spent $6.4 billion on warehouses and equipment, leaving $9.4 billion. Over five years, free cash flow was $34.1 billion against $36.8 billion of net income, even as its spending on warehouses and equipment rose every year.

Two things on the balance sheet explain it. The 10-K puts the first plainly: "We often sell inventory before we are required to pay for it." At year-end Costco owed suppliers $22.6 billion and held $19.3 billion of inventory, so suppliers were funding all of the goods on its shelves, and $3.3 billion more. Members also pay their fee up front: $3.0 billion of fees sat on the balance sheet as cash collected but not yet earned.

Costco turned all of last year's profit into cash, and suppliers fund its shelves

102%Free cash flow as a share of net income$9.4B against $9.2B last year

$3.3BOwed to suppliers, above the value of its inventory$22.6B of payables, $19.3B of goods

$15.1BNet cash: cash and short-term investments minus debtAbout $34 a share

Net it out and the balance sheet is strong: $21.3 billion of cash and short-term investments against $6.2 billion of debt. That cushion is only about $34 of each share's price, though, so it doesn't change the valuation much.

A contrast: over its latest 12 months, Amazon reported $135.3 billion of net income, $80.4 billion of it from "other income" outside its operations, while its free cash flow was negative $11.6 billion, because its capital spending ran ahead of operating cash, according to its latest 10-Q. That's a deliberate bet rather than a red flag, but its profit isn't cash you can count yet. The real warning sign is net income rising for years while operating cash flow stalls, one of the 10-K red flags worth checking first.

5. What could break the business?

For Costco, the big three are members losing loyalty, its reliance on the US and Canada, and rivals cutting prices. None is new. What you check each year is whether any is getting worse.

Where to look (15 minutes): Item 1A, "Risk Factors." Skim the bold headings first, which are written as full sentences, and read only the ones specific to this company. Then check the segment note for where profit comes from and the debt note for what's due soon. A risk that's new since last year's 10-K deserves the most attention.

Costco's answer:

Debt isn't on the list. Of its $6.2 billion, $2.2 billion is due within a year, against $21.3 billion of cash and short-term investments. Costco's own 10-K warns: "Because our business operates on very low margins, modest changes in various items in the consolidated statements of income... can have substantial impacts on net income."

At another company, worry about a large debt coming due within two years with little cash to repay it, a key supplier or license it can't replace, or a risk factor that appeared for the first time this year.

6. Who runs it, how are they paid, and do they own shares?

Costco's CEO, Ron Vachris, is paid mostly in stock and owns about $52 million of it. The weak spot is the low bar his stock award has to clear.

Where to look (15 minutes): the proxy statement (form DEF 14A), which companies file before each annual meeting. Read the Summary Compensation Table, the section explaining how pay is set, and the ownership table. Insider purchases and sales show up in Form 4 filings, listed on the company's EDGAR page.

Costco's answer: The latest proxy statement covers the year before last, because the next one isn't out yet. Vachris's total pay that year was $13.9 million, mainly a $1.2 million salary, a $0.6 million cash bonus and $12.0 million in stock, which is 86% of the total. The stock vests over five years, so most of his pay rises and falls with the share price for years.

He must hold stock worth seven times his salary. He held 52,258 shares, about $52 million at a recent price, or roughly 43 times his salary. In the past year of Form 4 filings, no Costco insider bought shares on the open market, and Vachris sold none. His only filing recorded his stock award and the shares withheld to pay tax on it. Other executives and directors made small sales. Open-market buying is the clearer signal, and there was none.

Stock pay can quietly dilute shareholders. At Costco it doesn't: buybacks of $848 million last year roughly matched the $924 million of stock paid to employees, and the diluted share count is the same as five years ago. The dilution and buyback calculator runs the same check on any company.

Red flags at other companies: bonuses tied to "adjusted" profit figures that management defines itself, awards that pay for growth however it's achieved (including expensive acquisitions), executives who own little stock, or several insiders selling heavily at the same time.

7. What is the price assuming, and what would make you sell?

At a recent price of $998, Costco trades at 48 times last year's earnings. That price assumes its strong growth keeps going for years.

Where to look (10 minutes): the share price on any quote page and diluted EPS on the income statement. Divide the first by the second to get the price-to-earnings ratio (P/E), how many dollars you pay for each dollar of yearly profit. Then compare it with the company's growth and the market's typical multiple.

Costco's answer: $998 divided by $20.76 of EPS is 48. Flip it and you get an earnings yield of 2.1%: each $100 of stock earns about $2.10 a year. Free cash flow gives almost the same multiple, 47 times. The median S&P 500 company trades at about 23 times its earnings over the past 12 months, by our count.

Costco itself used to trade near 26 times. Its own P/E at its year-end stayed between 19 and 31 for nine straight years, ending nine years ago at 25.8, and has been above 38 at each of the past seven.

Costco's P/E has nearly doubled in nine years

0102030405060x17 yrs ago15 yrs ago11 yrs ago7 yrs ago5 yrs agoNow25.8x48.1x48.1xCostco P/E17 yrs ago20.6x16 yrs ago19.3x15 yrs ago23.8x14 yrs ago25.2x13 yrs ago24.2x12 yrs ago26.0x11 yrs ago26.1x10 yrs ago30.4x9 yrs ago25.8x8 yrs ago32.9x7 yrs ago35.7x6 yrs ago38.5x5 yrs ago40.4x4 yrs ago39.7x3 yrs ago38.8x2 yrs ago53.9x1 yr ago51.8x2 mos ago45.5xNow48.1x

Then ask what has to happen for the price to work. Say Costco keeps growing EPS 13% a year for five more years, its pace over the past five. EPS would reach about $38. If investors still pay 48 times, the shares would be about $1,840. If they pay 26 times, about what Costco fetched nine years ago, the shares would be about $994: almost exactly today's price, five years later.

Five more years of 13% growth gets back to today's price at Costco's old multiple

Today's price$998

In five years at 48x, today's P/E$1,836

In five years at 40x$1,530

In five years at 35x$1,338

In five years at 30x$1,147

In five years at 26x, Costco's old P/E$994

Assumes EPS grows 13% a year, from $20.76 to $38.24. Share price only; the dividend adds about 0.6% a year.

Put the other way: for the shares to return 8% a year for ten years and end at 26 times earnings, EPS would have to grow about 15% a year for the whole decade, faster than the past five.

None of this says the price is wrong. It says the price already counts on Costco's best growth continuing. For proper valuation methods, see 5 ways to calculate a stock's intrinsic value. To test your own growth rate and future multiple, use the P/E multiple compression calculator.

Now the second half. Write your sell triggers before you buy, as numbers you can check in the next annual report, because after you buy it's easy to explain bad news away. For Costco, ours would track the two profit engines from question 2 and the price itself:

• The US and Canada renewal rate falls below 90%. It's 92.3% now and was 91% five years ago.
• Comparable sales, excluding gas and currency, grow less than 4% for a full year. They grew 7% last year, and that growth also drives the margin on goods.
• Earnings growth slows to single digits while the P/E stays above 40.

If you can't say what growth the price needs, or your only sell rule is "if it drops a lot," you haven't answered question 7 yet.

The one-page checklist

Print this, or copy it into a note, and fill in the last column for the stock you're looking at.

For the full due-diligence process behind questions like these, with a written thesis and scenarios, see how to research stock picks.

Our read

The question beginners are most likely to skip is the last one. A business you love that keeps growing feels like a buy, so the price never gets questioned.

Costco shows why that isn't enough. It passes the first six questions better than most companies, with one soft spot in how its CEO's award is earned, and that quality is exactly what a 48 P/E already charges for. Nine years ago, investors paid about 26 times earnings for Costco, a little over half today's multiple.

The useful link is between questions 2 and 7. Investors pay up because membership fees are steady and renewals are high. So the renewal rate is both the reason for the high price and the first number that would bring it down. If you own Costco, that's the line to read first in every annual report.

Go deeper with member research

The Valuation and expectations chapter of our fundamental research course picks up where question 7 stops. It shows how to turn any share price into the growth it requires: what a multiple compresses, a small five-year cash-flow model, why most of a company's value sits in the years after any forecast, and a one-line formula that backs out the growth a price asks for. It works through one company from start to finish and ends with a five-line valuation block you can fill in for any stock. It's one of 40 chapters in the course.

Keep reading

• How to research stock picks: the full due-diligence process, from a one-sentence thesis to sizing the position.
• The numbers to check before buying a stock: six metrics and what's normal across the S&P 500.
• How to read a 10-K: the sections to read in order, on a real annual report.
• Think like an owner: the free first lesson of the course, on turning a stock story into a business question.

Questions readers ask

What should I check before buying a stock?

Start with the seven questions above; each answer is in the 10-K, the proxy statement or a quote page. For the specific numbers, like P/E, free cash flow and debt, and what's normal for each across the S&P 500, see the numbers to check before buying a stock.

How long does it take to research a stock before buying?

About an hour and a half for a first pass through the 10-K and the proxy, using the timings above. Reading the full filing and writing out scenarios takes longer.

Where do I find a company's 10-K?

On the SEC's free EDGAR search: type the company name and filter for 10-K. Most companies also link it from the investor relations page on their website.

How we built this

Costco figures come from its Form 10-K for the 52-week fiscal year ended August 30, 2026, filed October 7, 2026, and, for five-year comparisons, its 10-K for the 52-week fiscal year ended August 29, 2021. Pay and ownership come from the proxy statement filed December 4, 2025, the latest available, which covers the fiscal year ended August 31, 2025; the CEO's shares are as of November 7, 2025. Insider activity covers Costco's Form 4 filings from October 2025 to October 22, 2026. The price is Costco's $998.31 close on October 21, 2026, from Yahoo Finance. Profit on goods is net sales minus merchandise costs minus SG&A. Free cash flow is operating cash flow minus additions to property and equipment. Net cash is cash and equivalents plus short-term investments minus current and long-term debt, excluding leases. Five-year growth rates compound fiscal 2021 to fiscal 2026. The S&P 500 median P/E (22.9) divides each member's October 19, 2026 close by its diluted EPS for the latest four reported quarters, for 414 companies with positive earnings; the method is in our numbers study. Costco's year-end P/E divides the last August monthly close from Yahoo Finance by that fiscal year's diluted EPS, for fiscal 2009 to 2026. The five-year price math grows EPS at 13.0% a year, Costco's fiscal 2021 to 2026 rate, to $38.24, multiplies it by each P/E (26 is about Costco's own year-end P/E nine years ago, 25.8) and excludes dividends. The ten-year figure solves for the EPS growth that lifts $998.31 by 8% a year for ten years at 26 times earnings, again excluding dividends. Amazon's 12-month figures run to June 30, 2026: its 2025 10-K plus the first half of 2026 minus the first half of 2025, from SEC XBRL data; free cash flow subtracts purchases of property and equipment.