Questions to ask before you buy a stock

How many widgets are they selling?

Companies make their bucks by selling stuff, and lots of it. Most publicly traded corporations rack up sales running into the hundreds of millions of dollars annually.

When you buy companies without significant sales, you are buying the "story," not the company's fundamentals. Some will succeed, but it's risky business.

Based on my own experience, risk-averse investors will avoid lots of heartaches by sticking with companies racking up at least $1 billion in annual sales. Does that limit the field too much? Not really. When I checked, more than 1,400 stocks fit the bill.

If you are more adventurous, you will want to go lower, of course. But the risk meter goes off the chart when you get much below $100 million in 12-month sales. At the very least, go no lower than $10 million in sales in the most-recent quarter.

Is cash flowing in or out?

Cash flow measures the amount of money that moved into, or out of, a company's bank accounts during the reporting period.

Cash flow is a better profit measure than earnings because it's harder to finagle bank balances than numbers like depreciation schedules that figure into earnings. In fact, many companies that report positive earnings are actually losing money when you count the cash.

There are different cash-flow definitions, but operating cash flow, which measures the cash flow attributable to the company's main business, is a good place to start. Find it on the quarterly cash-flow statement by selecting Statements under Financial Results, at the left of the quote page, and then selecting Cash Flow and Quarterly from the dropdown menus.