How to perform stock market due diligence before you invest II

Due diligence is defined as an investigation of a potential investment to confirm all facts. For individual investors, doing due diligence on a potential stock investment is voluntary, but recommended.
This article following the previous one (How to perform stock market due diligence before you invest) will discuss the next two steps you should take on your first review of new stock.

Step 3: Competitors and Industries
After steps 1 & 2, you now have a feel for how big the company is and how much money it earns, it's time to size up the industries it operates in and with whom it competes.
If we take a look at the economy from a broader perspective, all the companies are divided into various industries. So, keeping yourself aware of the recent happenings in various industries can help you to understand if the market cycle favors the target company's industry.
For instance, in the auto-making industry, cars are designed mostly to run on fuel, but due to an increasing hike in prices, rational consumers now would consider an electronic vehicle. Therefore, you should consider if your target company is planning to design such vehicles in the future.
Next, compare the margins of two or three competitors. Every company is partially defined by its competitors. You can find information about the company's competitors on most major stock research sites. Find the ticker symbols of your company's competitors along with direct comparisons of certain metrics for both the company you're researching and its competitors.
If you're still uncertain about how the company's business model works, you should look to fill in any gaps here before moving forward. Sometimes just reading about competitors may help you understand what your target company actually does.

Step 4: Valuation Multiples
Now it's time to get to the nitty-gritty of performing due diligence on a stock.
You'll want to review the price/earnings to growth PEG ratios (Note: Stocks with PEG ratios close to one are considered fairly valued under normal market conditions) for both the company you're researching and its competitors. Make a note of any large discrepancies in valuations between the company and its competitors. P/E ratios can form the initial basis for looking at valuations. While earnings can and will have some volatility, valuations based on trailing earnings or current estimates are a yardstick that allows instant comparison to broad market multiples or direct competitors.
At this point, you'll probably begin to get an idea if the company is a "growth" versus "value". Along with these distinctions, you should have a general sense of how profitable the company is. It's generally a good idea to examine a few years' worths of net earnings figures to make sure the most recent earnings figure (and the one used to calculate the P/E) is normalized, and not being thrown off by a large one-time adjustment or charge.
Not to be used in isolation, the P/E should be looked at in conjunction with the price to book PB ratio, the enterprise multiple, and the price-to-sales (or revenue) ratio. These multiples highlight the valuation of the company as it relates to its debt, annual revenues, and balance sheet.
Because ranges in these values differ from industry to industry, reviewing the same figures for some competitors or peers is a key step. Finally, the PEG ratio brings into account the expectations for future earnings growth and how it compares to the current earnings multiple.

Moving forward you also need to consider the other factors when performing due diligence on stock, including management, and risks which we will cover in the next chapter of the topic, for more details stay tuned.