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I Have my Competitors or Customers Financial Statement – Now What?

Guest post by: Stan Prokop

Article Overview: The article discusses basic techniques in analyzing and understanding a competitor or customer financial statement, with emphasis on the non- financial professional .

I Have my Competitors or Customers Financial Statement – Now What?

Business owners and executives do not necessarily have to have finance degrees to obtain critical understanding and information from customers, or competitor’s financial statements.

When we look at a financial statement to glean information about that firm we are really doing it in two steps. First we want to look at what we will call ‘comparisons ‘to make the number meaningful. We like to call them ‘relationships’ in the numbers. Secondly, we want to investigate various attributes of specific numbers or relationships.

Some items in the financial statement may seem extraordinary at first, and on further analysis we may find that it necessarily does not have any operational significance.

Probably the reasons we are looking at the statement in the first place, 99% of the time, is simply to look for overall ‘solvency ‘. That is certainly how our bankers are looking at our own firms financial statements!

We therefore employ certain tried and true ‘relationship ‘analysis of some of the key numbers in the balance sheet. Many first look at the ‘current ratio ‘. It’s a very simple calculation – current assets over current liabilities. It is probably one of the most widely measured ratios that every banker or financial analyst looks at first. It’s a good quick snapshot of determining how cash flows into inventories and then receivables , at the same time reflecting the short term liabilities the company incurs for suppliers, wages, etc. We would however, point out that the current ration can be exceptionally misleading if not analyzed in more detail. How? Simply because levels of receivables and inventory that are high improve the current ratio, when in fact those inventories and receivables might be turning very slowly, which is why they are high! That’s not good.

We’ve taken a short term look at the liquidity, now we look at the long term. That’s another basic relationship number. We look at total debt and total equity. In many industries it is acceptable to have 2 dollars of debt for one dollar of equity. A high debt level can poses problems.

Another overall technique in looking at some of the numbers is simply ‘comparison ‘. We look at year over year sales, are they going up or down. Profits last year, profits this year? Did sales go down this year but inventory and receivables went up? That’s a red flag. We have simply look at some key metrics of any business and determine if things are worst or better. The business person should look at the numbers and relationships of some of the numbers and say ‘what do these changes likely mean ‘

In summary, not all business owners have degrees in finance. Most have a general working knowledge of financial issues – that’s why there business is successful. Textbooks are written are careers are founded on financial statement analysis. By employing just some very basic techniques that we have illustrated the reader can fairly accurately assess the overall health of any company in a fairly short review. Naturally after that it can get as detailed as one wish depending on the need for the review. Firms that wish to extend large amounts of credit to a customer or to perhaps consider an acquisition of a competitor will of course invest their time and analysis accordingly!

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Article Tags: competitive analysis, financial statement analysis



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