ANALYZING THE FINANCIAL HEALTH OF A BUSINESS

We can look at a business’ size, market share, number of customers, employees, factories, or stores that it owns – these would all give us a feeling of health and strength. But that's not enough. We see large companies, with many assets, but which are not generating enough earnings; or, they are making profits, but there's not enough cash coming in. So, a firm might look good, even in its financial statements. But we need to know what questions to ask and where to look for answers. We must dig deep into the assumptions used in the construction of the annual reports. We see that the business’ assets are growing, maybe because it has acquired other entities. And its revenues are increasing. It looks like it's doing okay. But those acquisitions might not perform well. Maybe they have not been well-integrated and there are not sufficient cash returns to meet future obligations. We need to look closely at those things, to identify the red flags that suggest the firm is not performing as well as it looks on paper. Or, the business has large profits, but how do we know it’s not risking too much in order to earn them? Are they too variable? Can the firm still pay off its debts or employees’ wages? And what is the context in which the company is operating? What kind of business is it? A factory has a different structure and shows distinct results than a services provider or a supermarket: for some of these entities we expect to have many assets, for others, only a computer, chairs, and table, and the rest is the human intellect of the consultants – which is valuable for the firm – but can't be put on the financial reports.