How to Assess the Financial Health of a Company

company healthThe most important thing to do before investing in a company is assessing the financial health of the company. A rational investment is the one that is done after a comprehensive analysis of the financial performance and financial position of the company. Different investors have different goals therefore the assessment differs in accordance with the goals of the investors.

Some investors seek short term gains therefore they are more interesting in holding the stocks in a company for trading rather than for long term. In this case, investors are more interested in the market performance of the shares of the company. On the other hand, some investors seek to invest in a company for a long term. In this case, a deeper evaluation of the financial information of the company is necessary in order to determine whether the company will be able to give out a decent dividend to its investors. Following are the factors that must be considered in both the cases.

Factors to Evaluate In Case of Short Term Investment

For short term investment, the scope of analysis is confined to the market performance of the shares of the company. Different analysts rate the shares of the company to recommend the investors whether they should sell, hold, or buy the shares of a company. These analysts conduct extensive evaluation of the financial health of the company. Some of the factors be consider in this case are listed below:

  • Trend of Share Price
  • One of the most important factors to consider is the trend of the share price of the company over the past few months. The standard practice is assessment of the trend over a 52 week period. The highest and lowest point of the market value of the shares is noted in order to determine the extent of fluctuation in the share prices. These highest and lowest values are then compared to the prevailing share price. If the trend suggests that the share price of the company is moving upwards, it can be expected that the share price will rise even further and investing in the company may prove to be a beneficial decision.

  • Latest Financial Information
  • Quoted companies release their financial information on quarter basis. This information holds a significant impact on the market performance of the company. If the latest financial information indicates higher profitability for future periods, it would positively influence the market performance of the company and the share prices will rise.

Factors to Consider In Case of Long Term Investment

For long term investment, the assessment of the financial health of a company needs to be more comprehensive. Following are the factors that must be considered in this case:

  • Trend of Profitability
  • In order to assess the trend of profitability of the company, the financial information of the past five years of the company should be studied. The best way to evaluate the trend is by calculating the profitability ratios for each year and comparing them. It should be assessed whether the profits of the company are growing or following an uneven trend. If the trend of profitability is moving upwards, it may be safe to invest in the company for long term.

  • Trend of EPS
  • The dividend payout of the company mainly depends upon the Earning per Share (EPS) of the company. If the company has maintained a high EPS over the years, it may be able to give our higher dividends each year. Therefore, if the trend of EPS is positive, it may be a rational decision to invest in the company.

    Therefore, it can be concluded that the assessment of the financial health of the company depends upon numerous factors. These factors are assessed in accordance with the objective of the investor. Analysis is focused on different factors for both short term and long term investments.

Leave a Reply

Your email address will not be published. Required fields are marked *