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“Financial Analysis” is the term you are looking for, because that is what you are trying to do, i.e. find out how healthy and valuable the company is.
If they are a Corporation or publicly traded company (i.e. they sell stock in their company), look them up places like finance.yahoo.com. Look at how their stock price moves when graphed over 5 years, 1 year, 6 months, 3 months. Look at their Standard & Poor’s rating. Even if you do not find your company, look at some another ones to get a feeling for what the information means.
The accumulated wisdom of all of the stock investors is your best gauge of company value and company health.
Corporations also have to file annual reports with the Secretary of State of the state in which they are incorporated. If you can get an annual report, it is a gold mine of information. All the glossy pictures are propaganda to make the company seem healthy, valuable, and to justify big salaries for the company officers. Read that to understand the basics of the company operations. Then read all the footnotes and back pages. That is where they try to hide information that the law makes them reveal. They also have to file a more complete report, called a 10K, every year. Be sure and read that. You can probably find a copy on the internet at the Secretary of State’s website. Even if you don’t understand it all, there will be enough information in plain English to open your eyes.
Partnerships, sole ownerships, and limited liability companies (LLC) do not have to file all of those reports. But, the health of every company can be estimated from their Financial Reports (i.e. Income Statement and Balance Sheets). Get a copy if you can. Almost any company, except small private companies, makes that information available.
With the financial statements, you can really start the financial analysis. (They will be in annual report.)
1. Profitability- its ability to earn income and sustain growth in both short-term and long-term, based on the income statement
2. Solvency- its ability to pay its obligation to creditors and other third parties in the long-term;
3. Liquidity- its ability to maintain positive cash flow, while satisfying immediate obligations. Cash flow is like your own weekly paycheck. If you run out of cash, and cannot buy gas or pay daily expenses, you will develop bigger problems right away because cannot drive to work and eat. Likewise, if a company stops paying its workers for a week, then everything stops.
Both Solvency and Liquidy are based on the company's balance sheet, which is a snap shot of the company’s condition (but only on the day of the report). You need to look at quarterly and yearly financial statements to see trends.
4. Stability- the firm's ability to remain in business in the long run, based on both the income statement and the balance sheet, and other financial and non-financial indicators, such as is the owner or key scientist still healthy and working. Did a patent run out?
Financial Analysts often compare Financial Ratios to accepted “good” values. Such as debt to equity ratio (i.e. how much do they owe compared to how much they are worth.)
There are 30 or 40 common ratios, but look a few Key Ratios, such as:.
•P/E-ratio = Stock price / earnings per share
•return on equity = Net profit / equity
•return on assets = Gross profit / balance sheet total
For your company, look at trends:
•Past Performance over years, and recent months. Are the ratios getting better, same, or worse? Are revenue and profit going up.
•Future Performance: You try to predict their future from the trends you see in their long term past, recent past, and from events (such as patent running out, key person dying, or just got a huge government contract.)
•Comparative Performance: Compare their ratios to other similar firms and competitors.
With this in mind, go back to finance.yahoo.com and look at the financial ratios of some big companies to get a feel for what they mean.
Private Companies:
If it is a small, private company, then find out who the owners are and run background checks on them. You can find out
“How to do a Free Background Check”
Private companies are only as healthy as their owners, and maybe less so. So run the background checks on the owners, and simply ask for a financial statement (if it is not publicly available) so you can do some basic financial analysis. If you take the job, you are risking your economic future with them, so it would be worthwhile to buy an hour of time with a CPA (Certified Public Accountant) and have him review the financial statements with you.
You can run a property check on the owners by getting a
background check
on them or by
looking up their business records
here.
It will tell you what business they own. Check on those companies, too. One of their other companies can still bankrupt the owners of your company.
Check out the company's and the owner's reputation. Ask people about the company, especially employees and ex-employees.
Good luck. You are wise to look before you leap.
