Assessing Compnay's Financial Health

4987 Words Nov 10th, 2012 20 Pages
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Assessing a Company 's Future Financial Health

Assessing the long-term financial health of a company is an important task for management in its formulation of goals and strategies and for outsiders as they consider the extension of credit, long- term supplier agreements, or an investment in a company’s equity.
History abounds with examples of companies that embarked upon overly ambitious programs and subsequently discovered that their portfolios of programs could not be financed on acceptable terms. The outcome frequently was the abandonment of programs in mid-stream at considerable financial, organizational, and human cost.

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Clearly, many of these questions require information beyond that contained in a company’s published financial reports.

Step 3: Investments to Support the Business Unit(s) Strategy(ies)

The business unit strategies inevitably require investments in accounts receivable, inventories, plant & equipment, and possibly, acquisitions. Step 3 of the process is an attempt to estimate the amount that will be tied up in each of the asset types by virtue of sales growth and the improvement/deterioration in asset management. An analyst can make a rough estimate by studying the past pattern of the collection period, the days of inventory, and plant & equipment as a percent of cost of goods sold; and then applying a “reasonable value” for each to the sales forecast or the forecast of cost of goods sold. Extrapolation of past performance assumes, of course, that the future underlying market, competitive and regulatory “drivers” will be unchanged from the conditions that influenced the historical performance.

Step 4: Future Profitability and Competitive Performance

Strong sustained
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