How do I interpret an Unaudited Financial Statement?

Question

I am trying to determine the value of a business and this is the only information I have available to me. Is "Total Liabilities and Shareholders' Equity" a fair measure of value?

Answer 1

It really depends on why you need to determine the value. If you are deciding whether to invest in the company, then I would say revenues would be the most important thing. You would also want to see how much money they have sitting in their most liquid asset accountants (Cash and equivalents, A/R).. If they have a ton of their value in cash then you would want to find out if it's because they are planning an expansion, or if they are just not spending their money in the right places to grow the business. If they have a ton of their asset amount in A/R, you would want to find out if they are having trouble collecting. Lastly, you should compare their total assets to the their total liabilities, and especially their total current liabilities to their liquid assets, because this will help you determine whether they have the cash on hand (not tied up in inventory that has to be sold first - assuming it's not a service company) to pay the bills they will have due. Basically, you want to make sure they need/want your investment to grow the business and be successful, not to cover short terms bills they can't pay and prolong the time before they shut down.

Like the other poster said, unaudited financial statements aren't really worth the paper they are printed on, unless they are simply waiting to be audited or in the process of (if that's the case, you could probably trust them for the most part, as the company wouldn't want to pay their audit teams what it would require to make a TON of adjustments). If this is a publicly traded company, they will be forced to be audited and report to the SEC. If this is not a publicly traded company, and you don't know enough about business to figure out whether its a good investment on your own.. then you should NOT invest your money in start-ups!!! I'm assuming this is for a class project or something? If so, try to look at some of the things I talked about above, but there are really too many what-ifs for me to nail down how to approach it. My last suggestion would be to find financial statements for a company in a similar industry to see what percentage of their assets are in cash, etc.. that will help you figure out whether the company you're looking at is reasonable.

Answer 2

Unaudited financials aren't worth the paper they were printed on. Any number could be put anywhere. If you aren't going to require them to be audited at least get some verification of the key items (depending on the business this may be revenue, inventory, etc.)

Shareholders' equity is not a fair measure of value in most cases. A better indicator is the present value of future cash flows.

Answer 3

Its rubbish. You need more to do a decent level of analysis, at least a complete Balance Sheet (what do their assets consist of..a bunch of non collectable AR, outdated inventory, cash etc?) I would imagine you are interested in buying more than this companies debt so they should be able to provide it.

Get a copy of their income statement and a Cash Flows statement (you can make one from a balance sheet and income statement). Not to mention you should get at LEAST 3 years worth to establish any trends...do a flux analysis to see if there's weird increases or decreases in accounts and have them explain the reasons why.

Keep in mind that they are unaudited as well meaning you cant place too much reliance on the accuracy of the numbers represented, so discount offer prices accordingly unless you plan on testing some of the accounts during your due diligence...

Bottom line
1. Get a complete Balance Sheet listing for at least 3 years
2. Get Income Statements for at least 3 years (Cash flows if you can get em)
3. Due a basic flux analysis and Ratio analysis on all of them
4. Do basic testing of the accounts (get an AR listing and choose some of the bigger balances and ask for all receipts, shipping docs, bills of lading and payment information and trace the process through all of the stages to make sure it was processed correctly and to look for weakness in their control environment.

You've got a lot of work to do but they need to provide you with more info.