Liquidity Analysis
Liquidity analysis is a detailed review of working capital, involving the calculation of turnover rates for accounts receivable, inventory, and accounts payable. Any differences from the long-term average turnover rate are worth investigating further, since working capital is a key user of cash. It can also be useful to see if any strategic or tactical changes in a business have had a specific impact on liquidity levels; this can be a particular concern when an organization does not have ready access to additional cash.
Profitability Analysis
Profitability analysis is an analysis of the profits generated by a business. It can be broken down into profits by product, product line, geographic region, subsidiary, individual store, and so forth. For a smaller business with few products, a profitability analysis is probably only conducted for the business as a whole. The outcome of this analysis may be decisions to alter price points, adjust product configurations to alter costs, strip away overhead costs, and so forth.
Multi-Company Comparison
A multi-company comparison involves the calculation and comparison of the key financial ratios of two organizations, usually within the same industry. The intent is to determine the comparative financial strengths and weaknesses of the two firms, based on their financial statements. This is particularly useful for an acquirer, to evaluate which businesses in an industry are most worthy of an acquisition attempt.
Industry Comparison
An industry comparison is similar to the multi-company comparison, except that the comparison is between the results of a specific business and the average results of an entire industry. The intent is to see if there are any unusual results in comparison to the average method of doing business. If there are positive differences, it could be due to the unique strategic positioning of the business.
Valuation Analysis
A valuation analysis involves the use of several methods to derive a range of possible valuations for a business. Examples of these methods are discounted cash flows valuation, a comparison to the prices at which comparable companies have sold, a compilation of the valuations of the subsidiaries of a business, and a compilation of its individual asset values.
