Financial analysis without the relevant accounting documents
No Comments
Written by Atila on September 16, 2008 – 11:01 am
When a company’s accounting documents are not available in due time (less than 3 months after year-end), it is a sign that the business is in trouble.
In many cases, the role of an analyst will then be to assess the scale of a company’s losses to see whether it can be turned around or whether their size will doom it to failure. In this case, the analysts will attempt to establish what proportion of company’s loans the lenders can hope to recover.
It may perhaps surprise some readers to see that we have often used cash flow statements in reverse; i.e., to gauge the level of earnings by working back from the net decrease in debt.
It is essential to bear in mind the long period of time that may elapse before accounting information becomes available for companies in difficulty. In addition to the usual time lag, the information systems of struggling companies may be deficient and take even longer to produce accounting statements, which are obsolete by the time they are published because the company’s difficulties have aggravated in the meantime.
Consequently, the cash flow statement is a particularly useful tool for making rapid and timely assessments about the scale of a company’s losses, which is the crux of the matter.
It is very easy to calculate the company’s net debt. The components of working capital are easily determined (receivables and payables can be estimated from the balances of customer and supplier accounts, and inventories can be estimated based on a stock count).
Capital expenditure, capital increases in cash and asset disposals can also be established very rapidly, even in a subpar accounting system. We can thus prepare the cash flow statement in reverse to give an estimate of earnings. A reverse cash flow statement can be used to provide a very rough estimate of a company’s earnings, even before they have been reported.
