of a financial analysis
A. PRESENTATION OF THE BUSINESS
Activity and position (markets, production,
Markets (needs, segments, competition,
(availability of supplies, production cycle)
Selling network and methods
Management, human resources
Profitability: costs, margins
(for the last 3 or 5 years)
Sales / revenues, expenses / costs, margins
(table below) + comments on the level and
evolution of costs / profitability
Elements of P&L account
% of sales
% of sales
(items or groups of items
above 5 % of sales)
Operating profit / loss
Net profit (or loss)
Is it high / low ?
What sales are needed to reach it?
Is this sales objective easy to reach?
Financial structure elements
for the last 3 or 5 years
Main assets / liabilities (take as model the
profitability table above) + add comments
on solvency / liquidity
Risk (and opportunity) factors
on revenues / costs / solvency
Is the sensitivity of earnings low / high?
Balance sheet fragilities / strengths?
C. TARGETED QUESTIONS
The presentation document will not be a mess of observations,
only the main remarks will appear.
But, behind the curtain, a good analyst is above all a good detective, quite nosy,
always asking questions:
* Why does this specific item found in the balance sheet or in the P&L account
(income statement) changes faster / slower than that other one?
* Your sales fall, stagnate or rise less than those of your competitors. Is it related
to the quantities sold? or to the selling prices?
* OK, your sales grow. But does your market share grow or do you lose
ground compared to your competitors?
* Fine, profits rise by 18%! OK, but sales rise by 26%. Look, behind the scene,
margins are shrinking! Costs are rising by 32%. Are there productivity
problems, are unit costs rising or not decreasing enough? Or are you pumping
up sales by lowering selling prices to fight fierce competition?
* Your equipment and premises have a small / large valuation in your balance
Are they state of the art and productive? Or obsolete, insufficient (or on the
contrary too sophisticated,big and costly) unsuited or dilapidated?
* Why is your inventory so large ? What does it include? What is its real value
compared to its accounting value?
* I see that your customer accounts are larger and larger, but the reserves for
non payment stay low. How many customers pay late, for what amount, with
* I see your ST debts are rising. Are you late in paying your suppliers, employers,* Look, I have problems to understand those "off balance sheet" lines, and also
taxes, social levies?
those "footnotes".Do those hide something I should not see?
* Etc., Etc, on any other thing that puzzles you. Here, experience (*),
imagination, curiosity, but also, strangely, routine and discipline come into
play (need of written analysis procedures with a check-list of things to look at).
To analyze, unless superficially, accounts of stores, farmers, restaurants, builders, low
tech / high tech manufacturers, insurance brokers, real estate developers, etc.,
supposes a good knowledge of the peculiarities of those sectors of activity,
to gather benchmarks and have a long practice of analyzing their accounts.
You can find a larger list of analysis principles and ratios at:
D. WRAP UP
The last section is a wrap up that gives synthetic elements to help the decision making
process. This final section has to:
1) Be based on the company's economic
This supposes to have done a "SWOT"
analysis: Strength, Weaknesses,
2) Be based on scenarios of the business
This supposes to have done a
3) Include specificities related to the
Stock valuation, credit decision, complex
project: see the precisions below:.
D1. Wrap up on equity analysis / stock or business valuation?
Start from LT (5 years for example)
earnings per share prevision scenarios:
If possible, do it by building simplified prospective P&L accounts
(use the table above that shows the past profitability).
For this purpose, analyze revenues / costs / earnings sensitivity and do
a prospective analysis of the main evolution factors.
D.2 Wrap up on credit decision?
Start from the repayment capability.
The ratio (annual debt repayments / cash earnings) is an indicator.
But better have a multi-annual funding plan (resources vs. use of
We need also, as the docs say, complementary analyses:
Types and valuation of collaterals,
Legal situation / precautions / conditions,
Criteria for follow up and alert.
D.3 Wrap up on complex project
(business creation, acquisition, merger)?
For this type of financial study related to the implantation of an economic ,
project we can take elements from D1+D2 seen above,
It is also useful to have a little look at the marketing plan section,
and specifically business plan.
END (for the time being ?) of the financial analysis section