How to Analyze a financial position of a business

In order to understand the financial standing of a company you will have to consider its balance sheet. That again determines the value of the business. In addition to the balance sheet, you will also be required to consider the assets and liabilities of the business, the current ratio of the company and so on.

One way to find this information is look into its financial statement, of a company. In order to do that you will simply be required to type company quote for a particular business and you will get the results. For example, in case of Facebook you can get the details from http://www.bloomberg.com/quote/FB:US

It also is important for the business to maintain a debt free cycle as much as possible. Although it is good for every business to include some debt in its balance sheets, yet one shouldn’t overdo it so as to keep a safe distance from future financial woes.

Collating the business take up

You will have to analyze various things starting from the SWOT or analyzing the Strengths, the Weaknesses, the Opportunities, and the Threats, to the assets that the business has, the labor analysis, customer research, the Book Value and so on.

1. The SWOT process

– The SWOT is the process which centers on the intramural potency and drawbacks of a business. This would include the analysis of the services and products, the staff at work and so on.

SWOT also considers the external prospects and threats which may have a negative effect on your business. These will have to be the technological changes, the trends that consumers follow, company legislation, and so on.

2. Check the companies’ balance sheet

– The financial position of a company is assessed based on the assets and liabilities it has. Then, you will also be required to consider the shareholder’s equity.

These three are the main things which are generally considered in order to analyze the financial standing and the balance sheet of a business.

In this case to you will have to Google the details. Like, for Facebook you can get the details from http://finance.yahoo.com/q/bs?s=FB+Balance+Sheet&annual

3. The Current Ratio

– The current ratio is based on the total amount of present assets of a business divided by the total amount of the liabilities at present.

In general, financial analysts use this ratio in order to analyze the companies’ ability to manage the business based short-term financial obligations. The current ratio which is considered good depends on the industry.

However still, the ratio should not be too low or else, it is going to give an impression that the business is on the verge of insolvency.

4. Book Value

– The financial position of the business also depends on the Book Value of the company. In order to get the Book Value, we will be required to subtract the total amount of business liabilities from the total amount of assets. This gives us the amount of shareholder equity and this is considered to be the book value.

This also is known as the accounting value. So, this is mainly the amount which has been contributed by the shareholders till date and the profits which were acquired and sustained by the company.

5. Market-to-Book Multiple 

– If a comparison is done on the market value of the business with its book value, it is going to become easier for the investors to determine if a particular stock of the company is either over priced or under priced. So, this market-to-book multiple still is considered to be one of the most important tools for the investors.

Research proves that in general companies that have low market-to-book multiple stocks do perform better than those businesses which have the higher multiples.

Therefore, the above are some of the factors which are considered in order to analyze the financial standing of a business. It is very important to understand the financial position of a business for that is the only way in which you can decide whether or not to invest in the same business. Only if it seems that the business is doing well, can an investor go on to take any interest in the company

 

 

 

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Andy Raybuck

Andy Raybuck is a Professional Finance writer who has expertise in dealing with financial issues. He tries to impart to people the different situations and simple solutions to get out of difficult situations by contributing financial write ups to websites and blogs so that he can help people who are struggling with financial worries.

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3 Responses to “How to Analyze a financial position of a business”

  1. Darrin Bayer says:

    nice post ++++++ thanks thumbs up 🙂

  2. i will make a link to your post, from mine, if you dont mind, please reply, thanks

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