If you were buying a business what would you look for in the company's financial statement?
When buying a business, analyzing the company's financial statement is an essential step to assess its financial health and make an informed decision. Here are some key factors you should look for:
1. Revenue and profit margins: Examine the company's revenue growth over time to ensure it is stable or increasing. Additionally, assess the profit margins to understand how efficiently the business is generating profits.
To find this information, you can start by requesting the company's income statement (also known as the profit and loss statement) from the current and previous years. This document will provide details of revenues, expenses, and net income.
2. Expenses and cost structure: Understand the various expenses incurred by the business, such as operating costs, salaries, marketing expenses, and any outstanding debts or liabilities. This will help determine if the costs are reasonable and sustainable.
To find this information, refer to the income statement and also review the company's financial statements like the balance sheet and cash flow statement. These statements will provide further insights into the company's spending habits.
3. Cash flow: Examine the company's cash flow statement to evaluate its cash inflows and outflows. Cash flow is vital as it shows the liquidity of the business and whether it can cover its operating expenses, investments, and debts.
The cash flow statement can indicate if the business generates enough cash from operations or relies heavily on financing or investing activities. This information will help assess the company's financial stability.
4. Assets and liabilities: Study the company's balance sheet to assess its assets, liabilities, and equity. Analyze the assets to determine if they are valuable and if the company has sufficient working capital. Also, evaluate the liabilities to understand if the business has manageable debts and obligations.
By reviewing the balance sheet, you can identify the company's financial position and evaluate the value of its assets and liabilities.
5. Industry and market comparisons: While reviewing the financial statements, it's useful to compare the company's financial performance with industry standards and competitors. Consider factors such as market share, growth rates, and overall industry conditions.
To gather industry information, you can consult industry reports, financial news websites, and trade associations.
Remember, analyzing financial statements should be done in conjunction with other due diligence activities, including market research, assessing the company's reputation, and examining its future growth potential.