This chapter introduces traditional financial analysis on a firm. It is the process used to evaluate a firm’s financial health and the starting point in predicting its future cash flows.
Are the Numbers Reasonable?
Garbage In Garbage Out: First check if the raw data is reasonable.
Financial analysis should start by reviewing the numbers in the financial statements to check whether they make sense. First, does the growth in revenue seem reasonable (or plausible)? For example, in the scandal that engulfed the insurance firm Equity Funding Corporation of America in 1973, revenues were growing at 67 percent a year for 7 years.1 Today this may seem like a firm doing extremely well. However, back in the late ...