Whether your company is on the hunt for a strategic acquisition or your private equity firm is looking for its next bolt-on purchase for a core portfolio company, you’re likely eager to look under the hood to see what’s really going on. Once you get past the initial interest of a company, you will want to understand its financial health—is it stable, is it profitable, does it have a future?
Assessing financial health involves more than reviewing any financial statements you can get your hands on—there are many factors to consider as you’re assessing a company’s financial health.
Financial Statements Are One Place to Start
The balance sheet, income statement, and statement of cash flows give snapshots of the company at one point in time: You will want to know how much is it leveraged (balance sheet), how profitable it is (income statement), and whether its finance organization may be chaotic or operating efficiently (cash flow).
Is the company making good on its payments, or is it overwhelmed? Negative answers may not necessarily turn you off from a company—in fact it may show you that there’s room for improvement, understand the value your private equity firm could offer, and it may give you some room at the negotiation table.
What does the balance sheet really say about a company?
By showing a company’s assets and liabilities, in addition to shareholders’ equity, the balance sheet provides a window into how the business has built itself up and what it owes others. Many believe it’s here, in the balance sheet, that you can get a key indication of a company’s financial position. Has it taken on too much debt, and is that insurmountable to overcome considering what it’s bringing in?
How should you read a company’s income statement?
Also known as the profit and loss statement, or P&L the income statement is where you’ll find the company’s earnings.
What should you make of a company’s cash flow statement?
Cash is king, and it’s a key indicator of a company’s ability to stay solvent. Are the company able to stay on top of what it’s owed, does the finance team have good visibility into their cash situation? While growth potential may be top of mind when scrutinizing a company, the cash flow will indicate how the company is operating and whether it can continue.
Other Areas to Review When Assessing a Company’s Financial Health
A financial health assessment should look at both the strengths and weaknesses of a company—this is how you can determine how efficient it’s run, whether its valuation matches your view, and how much potential this company could have in light of your assumption about it.
At RoseRyan, we look closely at 16 essential areas of finance for startups. A series of questions reveals critical information about the company’s operations and financial management, including its growth plans, concerns about competition, partnerships, whether its systems have kept up with the growing business, and its financial obligations.
What’s missing? What has management overlooked? How important are these to you and your own plans for expanding upon a company you have invested in or your own company? How much can you help with the resources and skills you have access to, or do you need to expand on the expertise you have within arm’s reach?
How to assess the financial health of a company?
Assessments and evaluations early on can save you from surprises and problems later on. RoseRyan can help you think through these strategic issues for a company you are reviewing or reviewing your company and pinpoint where room for improvement is evident. Reach out to learn more about our financial health assessments.
