How to write a finanical evaulation of a company?

Question

We had to get annual finanical report of a company, after we learn about the report. Now we must write a finanical evaluation, assessment of the company from the perspective of an investor.

Answer 1

Can't really answer your question other than barking up the wrong tree unless we know what kind of industries you are working with. Each industries have their own particulars and strategic issues and analysists watch those tendencies very closely. You have to understand what critical elements confront that particular industry before you do your anaysis.

In general, you start with your ratio analysis. There are many, many ratios that you can track. Some are critical while others may be meaningless. If you are looking at a financial statemenst there should be plenty of numbers to come up with a bunch of financial ratios and give you a good idea at least on the numbers stand point how a company is doing.

1. Asset to liability ratio.... your are looking at how much you own to how much you owe. Some industries are highly leveraged. Some are not. In general a 2 to 1 of Ok.

2. Current Ratio... your short term asset against your short term liability. This is liquidity...our ability to pay bills quickly.

3. Quick ratio....short term assets minus inventory against short term liabilities. This really tells the companie's ability to meet its day to day cash position

4. Inventory turn over...if the company is in sales or manufacturing but is meaningless if you are and airline company.

5. Return on total assets and return on investment...how efficient is the company using its money (or its stoch holders investment)

6. Dividend payments...an investor gets two things back for investing ...dividend and appreication in stock value. Is my dividends pay better than a CD or money market? If the company is not paying dividends, can I expect the stocks to take off like the Dot Com companies a while back?

7. price to earning (P/E ratio), the higher reflects investor confidence in the compay.

8. Profit margin... it tells you how quickly you can break even and how risky the business may be. The road to hell is pathed with volume. Airlines have a very high B/E point and a spike in fuel will put them in the red (That is another thing to watch).

This list goes on and on. But you need to know what are the strategic issues in that industry is in order to have some meaningful analysis. Crunching numbers doesn't do anything. There are other aspects that does not always appear on the financials. Market share, paterns held, management team, research and development, goodwill (the ability to charge premium because of the companies reputation), the company's dependency on an uncontrollable strategic supply such as fuel for an airline company. These are things an investor need to have to assess the health of a company. The following is a place you can find just about any financial you want. I am sure some of them may be useful to you. Have fun.


http://cpaclass.com/fsa/ratio-01a.htm

Answer 2

This can be complex. It depends on the company and whether or not it is a high tech start up requiring lots of investment or if it is a stable ongoing company.

My perspective is from a stable ongoing company as that is what I manage.

1) Cash is "KING" Cash flow is critical in viable companies. How do they bring in receivables "money owed" are they managing those receivables based on the terms within their agreements? Are they managing payables as effectively and paying on time and taking advantage of credits available, as percentage discounts through paying within a shorter time period as opposed to extending payment terms beyond that. This is critical to negotiate whith raw material suppliers.
Is Cash in better than cash out? Positive cash flow is KING.

2) Inventories, Are they maintained at minimum where possible?
Why buy inventory today for something I am going to produce next month.
What are the inventory turns?
Well managed inventory is a reflection of a well managed company.

3)Sales and Gross margins, Are sales within forecast? Historical sales trends are they as projected and what are the future sales trends! Gross Margins- based on variable costs are they within the company targeted standards? IE: are they making profits on the products they produce and are those profits in line with their quote assumptions.

4)Fixed costs- Fully absorbed on current business or are they over extended? If over extended why? Are they preparing for increased business? Are they carrying to much assets and costs for current business?

5)Re-investment- Are they putting money back into the business at an acceptbale rate to support ongoing operations and future business and or upgrades required to assets.

6)Debt to equity ratio- Are they borrowing money at the most effective rate to support new business and or capital expenditures to improve current or future business opportunities.

7)Scrap rates and process capability- Are they wasting valuable product, material, equipment and resources to re-produce what they already made the first time.

8)R&D- Are they doing it effectively and more importantly are they taking full advantage of tax credits available?

9)Human Resources- Safety records- turnover rates- don't exclude these from financial viabilty reports as they are critical in reflecting management and company culture. What is the talent within the company that got it to its current position?What is the talent to maintain it and what talent is required to get it to a higher level?


10) Are they meeting all internal company governance requirements as well as banking covenants?

These are my 10 "rays of light" and the things I look for on a finacial viabilty report.

Hope it helps!

By the way finacial people will look at this and may think I'm nuts but I don't read financials from a financial perspective I read it to manage viable companies, I am operations and my responsibility is to "make" things happen not to read about them 30 days after the fact when the financials are published.

Apologies to CGAs (LOL)