How to Determine the Financial Strength of a Company
June 5th, 2006 (Investing)
To judge the financial strength of a company, ask yourself the following questions:
1. Are the company’s assets greater in value than they were three months ago, a year ago, or two years ago? Compare current asset size to the most recent two years to make sure that the company is growing in size and financial strength.
2. How do the individual items compare with prior periods? Some particular assets that you should take note of are cash, inventory, and accounts receivable.
3. Are liabilities such as accounts payable and debt about the same or lower or higher compared to prior periods? Are they growing at a similar, faster, or slower rate than the company’s assets? Remember that debt that rises faster and higher than items on the other side of the balance sheet is a warning sign of pending financial problems.
4. Is the company’s net worth or equity greater than the previous year? And is that year greater than the year before? In a healthy company, the net worth should be constantly rising. As a general rule, net worth should be at least 10 percent higher than the previous year.