analysis a company's future value - unix1998/technical_notes GitHub Wiki

To value a company's future or long-term value, you should consider a combination of metrics and indicators from the income statement, balance sheet, and cash flow statement. Each report provides different insights, and together they give a comprehensive view of the company's financial health and future prospects. Here are the key metrics and indicators from each report:

Income Statement

  1. Revenue Growth: Consistent growth in revenue indicates the company's products or services are in demand.
  2. Net Income: This shows the company's profitability after all expenses. Look for consistent profitability or an upward trend.
  3. Earnings Per Share (EPS): This measures the profitability on a per-share basis, useful for comparing companies.
  4. Gross Margin: Indicates the percentage of revenue that exceeds the cost of goods sold, showing how well the company controls production costs.
  5. Operating Margin: Reflects the percentage of revenue remaining after deducting operating expenses, important for assessing operational efficiency.

Balance Sheet

  1. Assets: Total assets provide a snapshot of the company's resources. Look at current assets for short-term liquidity and non-current assets for long-term value.
  2. Liabilities: Total liabilities show the company's obligations. A lower debt-to-equity ratio is generally favorable.
  3. Equity: Total equity represents the owners' claim after liabilities are subtracted from assets. Look for growing equity over time.
  4. Debt-to-Equity Ratio: This indicates the relative proportion of shareholders' equity and debt used to finance the company's assets.
  5. Current Ratio: Calculated as current assets divided by current liabilities, this measures short-term liquidity. A ratio above 1 indicates good short-term financial health.

Cash Flow Statement

  1. Operating Cash Flow (OCF): Indicates the cash generated from normal business operations. Positive and growing OCF is a good sign.
  2. Free Cash Flow (FCF): Calculated as operating cash flow minus capital expenditures, it shows the cash available for expansion, dividends, and debt reduction.
  3. Cash Flow from Investing Activities: Provides insights into the company’s investment in growth (e.g., capital expenditures) or asset sales.
  4. Cash Flow from Financing Activities: Shows the cash flow between the company and its owners and creditors, indicating how the company finances its operations and growth.

Combined Analysis

  1. Consistency and Trends: Look for consistent performance and positive trends across these reports.
  2. Return on Equity (ROE): Calculated as net income divided by shareholders' equity, it measures how effectively the company uses equity to generate profit.
  3. Return on Assets (ROA): Calculated as net income divided by total assets, it measures how efficiently the company uses its assets to generate profit.
  4. Debt Coverage Ratios: Such as interest coverage ratio (operating income divided by interest expense), to assess the company's ability to service its debt.
  5. Growth Potential: Assess revenue, profit, and cash flow growth potential based on historical data and industry trends.

Summary

No single metric can provide a complete picture of a company's future value. A comprehensive analysis should include metrics from the income statement for profitability, the balance sheet for financial stability, and the cash flow statement for cash generation and usage. By combining these metrics, you can better assess a company's overall financial health and long-term value potential.