How to assess the financial health of an Indian Company

By Dr Suvrokamal Dutta

An assessment of the long-term financial health of a company is a vital task for its mangers formulating its strategy and for investors/lenders who provide in various forms. The India Street decided to take a look at the important dimensions of such an assessment.

Profitability-

• What is the profitability position of the firm?

• What has been the trend in profitability?

• Has profitability been influenced by

• Short-term supply shortages

• Changes in financial accounting practices

• Cyclical variations

• Curtailment of strategically important expenses

• What has been the impact of the following on return of equity?

  • Operating margins

  • Asset utilization

  • Financing mix

In my opinion, one must take into account the fact that is the profitability sustainable, given the market outlook, competitive developments and regulatory pressures.

Hidden problems-

According to experts, it is of paramount importance that you are aware of hidden problems such as

• Large build-ups of inventories in relation to sales

• Large build-ups of accounts receivable

• Low capacity utilization

• Large contingent liabilities

Need for additional finance-

• What would be the additional finance requirements over the next year/ next 2-5 years to carry out strategically important programmes?

• Does the company have a seasonal financing need?

• Does the company have a cyclical financing need?

• Does the company have a secularly growing need for additional finance?

• What will be the quantum of internally generated funds?

Soundness of financial structure-

• How sound is the financial structure of the company, given its riskiness and its future financial needs?

• What is the debt-servicing burden?

• Will the firm service the debt from internal sources?

• How prompt is the company in paying its suppliers?

Access to external finance-

• Can the company raise equity funds? How is the market for equity shares? What is the control consideration?

• Can the company obtain long-term debt capital?

  • Who are the possible suppliers?

  • What are their lending criteria

  • What restrictive covenants are likely to be imposed?

• Can the company raise-short term debt capital?

• Does the company have redundant or disposable assets, which can be sold to raise additional funds?

“Balance among goals, strategies, investment requirements, financing needs and financing capabilities are the important factors when assessing the financial health of an Indian company,” pointed out Rahil Siddiqui, noted finance expert in India.

In that regard, take a note of the below-mentioned points:

• Do the proposed product-market strategies of the company subserve its goals?

• Does the investment plan of the company reflect the chosen product-market strategies?

• Are the financing capabilities of the company adequate to meet its financial needs?

• Is there a reasonable balance among goals, strategies, investment plan, financial needs and financial capabilities?

All in all, one can safely say that for assessing the financial health of an Indian company you must have an understanding of:

• Future industry economics and structure

• Competitive and operating characteristics of business

• Long-term goals and plan of management

• Criteria used by various segments of the capital market and money market and financial statements of the company

• Quality of management