Analysis of Financial Statements    

Studies performed in Israel and the U.S.A. indicate that in the majority of cases in which corporations fell into difficulties clear warning signs could have been identified in their financial statements a year or two before the crisis erupted.

These warning signs are expressed in dangerous trends such as a decline or a slow-down in the growth of sales, accumulation of relatively large inventories, large-scale credit extended to customers, unusual increase in financing expenses, use of too-dangerous financial leverage, and the like.  In a post-factum analysis, warning signs of difficulties in the Company are seen very clearly and unequivocally.  The question is, why does the management not take efficiency and recovery measures as soon as the first signs of the impending crisis appear in the financial statements?

(For instance - the Enron Energy Co. in the U.S., and Club Market in Israel)


 

Examples of financial ratios:

 

Liquidity ratios - the enterprise's ability to survive for the short term

Financial leverage - the enterprise's ability to survive for the long term

Yield on capital - my yield on investment, e.g. compared with alternative investment at banking interest

Profit v. assets - would increasing the fixed assets in my business increase my profit?

Operating efficiency ratio - the number of days inventory is held before it is sold, how many times does the business turn over its sales to its customers, average number of days for collecting debt, average number of days for payment to suppliers, etc.

Debt aging report - list of old debts not collected from customers.

And so on.