Question

What types of questions can be answered by analzying financial statements?

Answer 1

- Would an investment generate attractive returns?
- What is the degree of risk inherent in the investment?
- Should existing investment holdings be liquidated?
- Will cash flows be sufficient to service interest and principal payments to support the firm's borrowing needs?
- Does the company provide a good opportunity for employment, future advancement, and employee benefits?
 - How well does this company compete in its operating environment?
- Is this firm a good prospect as a customer?

Answer 2

If indeed the books are straight forward, you may learn the general health of the business itself by analyzing the growth patterns.  Of course the in the "black" and in the "red" is a clear indication of the finanacial health.  Areas of concern can be discovered by preparation of a 'bottom line' or to learn exactly how much cash is flowing, not how much is only on paper.  Breaking down the books involves a detailed analysis of each category to eventullay learn the net worth of a venture.  After examining the books, compare them to the actual tax returns for at least 5 years prior.  Examine the companies internal auditor's reports but do so with a jaundiced eye since the person preparing those books may have been influenced a tiny bit when they recieved their pay check.  An auditor's background and reputation should be taken into consideration.  Ask to see more than the actual company books, ask for the original documents that were generated during large transactions and don't be put off by a non-disclosure agreement.