Evaluating_the_Financial_Health_of_a_Company - Evaluating...

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Evaluating the Financial Health of a Company General managers are required to judge the financial condition of companies for many reasons: to evaluate the performance of managers; to assess the robustness of a competitor, supplier, or customer; to identify business risks; and to illuminate investment or acquisition decisions. This note summarizes a few key ideas with which a general manager might direct the analytical process. A manager usually wants to know how healthy the company is. Using a medical metaphor, we may characterize a company as being ill, healthy, or fit. What matters is where the firm lies on the spectrum of health. The following questions help expose the company’s condition: 1. Is the company in, or approaching, financial difficulty? Most companies are not in financial distress, but it makes sense to check for this possibility immediately as a way to eliminate at least one end of the spectrum. Firms in financial difficulty display several of the following conditions: a. Low or negative earnings. Profitability ratios, which are based on net earnings and operating earnings, can reveal difficulties in the firm’s ability to cover its costs. b.
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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Evaluating_the_Financial_Health_of_a_Company - Evaluating...

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