How do you do background check of a company that you are interested to work for?
I'm currently looking for a job since my current job is having financial difficulties... I don't want to go from one work place to the other, with same or similar problem. How do you find the company's financial health and other background?
“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 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.
Well this was very, very helpful. I am also looking for a job at a company I don’t know much about and would like to do a background check. I knew about the annual report and will be sure to read it but I didn’t know about the 10k report. That should be an interesting read especially since they need to file it yearly. This is a big company so Financial reports are easily available. Thank you so much for explaining what to look for – I’m very grateful for this!
When doing any company background search you should always consult their 10k report as it usually shows a lot more than the annual report. You’ll see right away what kind of company it is. You should also try to predict their future performance based on every piece of data you have from the past years and the recent 6-12 months. This will tell you what you can expect if you join this company. Also, if you don’t know how to read these documents it’s always better (like it has already been mentioned here) to get a CPA to do it for you. He/she will save you a lot of time and can read these numbers much better than you probably can.
Thanks, Elizabeth. Seeing as you’ve also mentioned the CPA option I am considering it. I will have to see how much it will cost but I’m thinking it’s the better option. I know how to read the numbers but I’m surely not as skilled as a CPA that’s for sure. And I want to make sure I make the right choice here and not have big surprises down the road. A free background check can only do so much I think.