Valuation: Methods and Models in Applied Corporate Finance

2. Financial Statement Analysis

2.1 Introduction

Before you value a project, such as a firm, you must conduct some basic financial due diligence to assess the financial position of the firm. The financial position of a firm determines its success or failure. If its debt gets too high, its cash balances fall too low, its operating margins are too low, and so on, it will not likely survive much longer. Financial health provides the firm with more flexibility in dealing with unexpected developments. All firms use a fairly standard way of reporting on their financial positions. Understanding these standard ways in which firms report is a powerful tool for analyzing the performance of an organization. Three particular statements—income statements, ...