Booyah Breakdown: Back to School

Four Assignments Before You Buy

Before you buy a stock, you must do these things.

1. Go to the Securities and Exchange Commission's Web site and pull up the company's quarterly or annual reports. Dissect them. We've written stories on how to analyze the 10-Q, balance sheet, income statement and cash flow statement. Learn how to navigate through the financial statements and use them to assess your company.

Don't avoid the text. The company has a story, so read it. Understand exactly how the company makes its money. If it's in broadband, then you should be able to define "broadband" to anyone. If it makes children's clothes, then go buy some, let your kids wear them and then send them through a wash cycle. Get involved with the product.

2. Understand the metrics -- or ratios -- that pertain to your company's biz. This requires some number-crunching, but you need to be aware that certain metrics are more relevant in certain industries.

And understanding those metrics allow you to better judge that company, Cramer noted in a June episode of "Mad Money." He then detailed some important metrics:

For a cable company, the key metric is enterprise value (market cap plus debt) divided by the number of subscribers.

For a hotel, the key metric is average revenue per room.

For airlines, it's average revenue per seat.

For retailers and restaurants, look at same-store sales.

For tech stocks, evaluate gross margin per product sold.

For financial stocks, the key metric is net interest margin, i.e., how much money was made on each dollar the financial institution had in assets.

Once you know the key industry metric, compare it with the company's peers. The retailer with the best same-store sales, for example, is the one you want to own, Cramer says. So while all the numbers are important, some clearly hold more weight.