The Financial And Economic Analysis Of A Company

Economic Analysis

The Financial And Economic Analysis Of A Company

When you want to take over a company, you need to carry out an analysis to ensure that the company in question is worth buying. The analysis of a company is not limited to that of its financial statements (even if this is a crucial step). Still, it must extend to the study of its environment: the geographical sector, the market and customer analysis, changes in legislation, etc. The following steps must be taken to carry out the analysis of a company:

  1. The first is to study the financial statements of the targeted company;
  2. Then, we look at the company’s sector of activity: what is the potential of the market in which it is located? Market research can be helpful;
  3. Afterwards, the analysis of the geographical sector of the company is also essential;
  4. And finally, we will end with the evolution of legislation in the sector and its compliance by the company.

This method of analyzing a business is, of course, familiar, and there are many, but it is organized into different critical stages of a business takeover.

Financial Analysis Of The Company

The analysis of a company necessarily involves the study of its financial statements, regardless of its size or activity. Can you imagine taking over a business that is making significant losses? Who is in debt? Who has a very low turnover and cannot cover expenses?… To carry out the financial analysis of a company, two elements are essential:

  1. the income statement, ideally for the last three years;
  2. and the balance sheet over the same period.

The study of these statements should be carried out by looking at only some of the amounts that appear there, and it is necessary to identify the significant elements that make up these financial statements. Then, these essential elements must be analyzed in detail using other supporting evidence. We will not discuss the financial analysis of a company in detail because a complete book would be necessary.

Analysis Of A Company’s Balance Sheet

The company’s balance sheet represents its assets, including everything the company has in its possession and all the debts it has in return (we also talk about jobs and resources). The financial analysis of a company involves studying the following elements:

  1. The result of the financial year and previous financial years, which is on the liability side of the balance sheet, is the company generating profit or is it making losses? ;
  2. The company’s equity, which is at the top of the balance sheet liability: Equity is a source of information on the value of a company. When dividends are distributed each year, this should be taken into account because these distributions reduce the amount of equity;
  3. The company’s debt: here, it is necessary to analyze the company’s obligations and, in particular, loans, supplier debts, tax, and social security debts. A company that has too much debt risks having future cash flow problems.
  4. The company’s fixed assets: are there a lot of machines? Buildings? Patents? It is necessary to look at the company’s fixed assets in detail because there are essential indicators there, such as the date of completion of investments: what elements will need to be replaced soon?
  5. Cash: this concerns the company’s cash flow, is the company financially healthy or not?

Analysis Of A Company’s Income Statement

The income statement is the summary of the company’s operations over a given financial year, which includes all sales made and expenses incurred. The financial analysis of a company involves studying the following elements:

  1. The turnover achieved over the last financial years: is it growing or decreasing? How can we explain its evolution?
  2. The company’s margin: is it in line with industry averages? Otherwise, what are the reasons for this gap?
  3. The payroll: is it consistent with what is practiced in the sector?
  4. The result of the exercise: This element has already been mentioned previously. If the impact is negative, we can seek to identify the responsible cost items. When it is positive, we must ensure that it is indeed due to the company’s activity.

Analysis Of Company Resources

During this stage of analyzing a company, we will seek to provide answers to the following questions:

  1. What are the means used by the company to carry out its activity?
  2. Will this mean that the company has to be replaced, or is there a more innovative, more productive method?
  3. Will the teams in place in the company easily accept the change in direction, and will they agree to change, if necessary, the procedures in place?
  4. Doesn’t the departure of the manager risk leading to the release of one or more employees?
  5. What is the average age of employees, and are there any imminent retirements expected?

The list of questions that one could ask is, of course, endless when analyzing a company’s resources. The essential difficulty lies in being able to target the critical points to be addressed when researching the company. The subjects for reflection are, in fact, different depending on the size of the company, its organization, and its sector of activity. Prior experience in the field of activity of the company analyzed is advantageous to carry out this step successfully; this will facilitate the identification of critical points to study.

Business Market Analysis

As with the creation of a business, the takeover must also be subject to an analysis of the business market. The study of supply and demand in the sector of activity allows the buyer to:

  1. Ensure that there is indeed a market to exploit and analyze that the prospects for development are encouraging to avoid taking over a business in a sector in decline;
  2. Analyze the company’s customers, their habits, etc.;
  3. Take an interest in existing practices in this market and potential innovations;
  4. Find out about the competition, the prices charged, the concentration of companies;
  5. Identify the needs of the population in the targeted area, their consumption habits, the average budgets for this or that service, etc.

Analysis Of The Company’s Location

Analyzing a company also involves analyzing its geographic location. Through this analysis, we must be able to provide answers to the following questions:

  1. Why did the company set up here?
  2. Are there any possible future projects (redevelopment, business relocation, etc.) that could harm the functioning of the target company?
  3. Is this location optimal for carrying out your activity?

Certain types of activity, for example, require you to be in a dynamic city center rather than in the middle of the countryside, such as clothing stores or bars open at night.

Analysis Of The Legislation Of The Sector Of Activity

When we analyze a company, we must take an interest in the legislation applicable to the sector of activity  and ensure that the company complies with it:

  1. Does the company meet health and safety standards?
  2. Are the company’s employees adequately trained to deal with the risks to which they are exposed?
  3. Does the company comply with applicable environmental protection rules?

These various points are essential for the buyer, and they make it possible to plan the possible measures to be taken to come back into compliance with the legislation and, if necessary, to quantify the cost.

Conclusion On The Analysis Of A Company

The process of analyzing a business could be smoother. Still, you have to stick to it because the risk taken, especially financially, in the context of a business takeover is much heavier than a business creation. We advise you, in this critical stage of a business takeover, to be accompanied by an accountant. After having carried out these different stages of analyzing a company, you will be able to make an informed decision: is the takeover of this company an exciting opportunity, or is it not worth it?

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