10 Critical Facts about Financial Analysis that You Must Know Featured
One of the critical objectives of financial analysis is to determine the risk that a company will run out of money and be unable to repay its financial obligations when they come due.
Understanding financial analysis from a lender’s perspective is critical, so here’s what you MUST know:
Capital providers of capital have different metrics to assess and track the financial health of a business.
Understanding financial analysis from a lender’s perspective is critical, so here’s what you MUST know:
Capital providers of capital have different metrics to assess and track the financial health of a business.
1. Historical performance will be the starting point for a forecast, but any off-trend assumptions need to be well supported.
Forecasts should also always be viewed in the context of management’s future strategies and industry-specific dynamics.
Forecasts should also always be viewed in the context of management’s future strategies and industry-specific dynamics.
2. Equity investors use earnings performance or market growth potential as one way to value common stock. In contrast, income levels alone do not help determine credit quality for a lender.
3. If a business cannot meet its debt obligations, its creditors will likely put the company out of business.
Financial obligations are repaid with, not with, accounting-adjusted earnings metrics such as EBITDA.
4. Financial ratio benchmarks depend on numerous individual variables.
What might be considered a strong performance in one industry may be weak in another.
5. Accounting policy choices reflect the level of management aggressiveness.
How revenue, expenses, and debt obligations are recorded indicates how aggressive management is, directly impacting the perceived business risk, its ability to attract capital, and the cost and terms of money.
3. If a business cannot meet its debt obligations, its creditors will likely put the company out of business.
Financial obligations are repaid with, not with, accounting-adjusted earnings metrics such as EBITDA.
4. Financial ratio benchmarks depend on numerous individual variables.
What might be considered a strong performance in one industry may be weak in another.
5. Accounting policy choices reflect the level of management aggressiveness.
How revenue, expenses, and debt obligations are recorded indicates how aggressive management is, directly impacting the perceived business risk, its ability to attract capital, and the cost and terms of money.
6. Not all leverage is created equally. From a cash generation perspective, assets deemed to be stable and of high quality can be leveraged more than assets of questionable value and cash flow.
7. Point-in-time analysis can be misleading unless it is accompanied by trend analysis and a forecast supported by reliable assumptions.
8. Operating assets can be under or overvalued on the balance sheet.
For example, goodwill associated with a recent acquisition will inflate assets, while well-depreciated assets are often undervalued on the balance sheet.
9. An increase or decrease in profit margins may indicate a fundamental shift in the business dynamics.
There might be profound underlying changes in the competitive environment, the supply chain, or the economy.
10. Previous performance may not be a good indicator of future performance.
Real-life business events can change the historical assumptions that delivered or missed financial performance targets in the past.
We hope these ten facts were helpful. This blog post was written by the help of Equitest - AI business Valuation software.
For example, goodwill associated with a recent acquisition will inflate assets, while well-depreciated assets are often undervalued on the balance sheet.
9. An increase or decrease in profit margins may indicate a fundamental shift in the business dynamics.
There might be profound underlying changes in the competitive environment, the supply chain, or the economy.
10. Previous performance may not be a good indicator of future performance.
Real-life business events can change the historical assumptions that delivered or missed financial performance targets in the past.
We hope these ten facts were helpful. This blog post was written by the help of Equitest - AI business Valuation software.
If you want to know your company's value, you can do it with Equitest in 30 minutes.
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