What Are the Best Tips for Financial Health Analysis?

Geri Terzo

One way to perform a financial health analysis on a business is to compare its market share, revenue, profit and other results to those of its industry peers. It might be possible in certain segments of the economy to establish benchmarks by which to model performance. If business results are in line or better in comparison with the industry barometer, the results of the financial health analysis are favorable. Anything that falls below that expectation, however, is an indication of under-performance.

A company's market share, revenue and profit may be compared to industry peers' to gauge its financial health.
A company's market share, revenue and profit may be compared to industry peers' to gauge its financial health.

Examining trends in business performance is another way to initiate financial health analysis. This requires some historical performance by which to compare current results. The trend in whatever component is being measured — whether it is stock performance; market capitalization, which is a measure of the size of a company; or product distribution — is an indication of how financially sound a business might be. An increasing trend is a positive sign, and a downward trend in financial performance might be cause for concern.

Assessing a company's liquidity, or its access to cash in the short term or long term, can be a factor in performing financial health analysis. If a company can quickly convert assets into cash, this supports a solid financial status. When assets are difficult to liquidate, it might compromise a business' solvency in especially challenging economic or corporate conditions.

Considering the way that debt is managed is another contributing factor in financial health analysis. Debt that is excessive in relation to the value of total assets owned can be damaging for the future of that organization. One way to improve this ratio is to increase profitability at a firm, which in turn can lead to a more attractive market value for an entity. Short-term liabilities can be more concerning regarding the financial health of a company because of the potential urgency tied to these debts. Longer-term debt is less likely to compromise the overall financial health of a company.

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On a personal level, an ability to service debt requirements also is a positive sign in financial health analysis. The reduction of debt is a step toward creating a sound financial picture. By determining a debt-to-income ratio, which is the percentage of income that must be directed toward debt obligations, an individual can quantify financial health somewhat. A healthy ratio is dependent on what the economic standards in a region might be, but the higher the percentage, the weaker the financial health of an individual.

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