Guide to analysing financial statements

[centastic]

Hi - anyone have a suggestion for a general list of things I should be looking out for when evaluating a small business for purchase?

eg

- large unexplained increases/decreases in YOY costs or revenue
- a decrease in electricity cost that cannot be explained by low-energy lighting/solar (could be an indicator of less being produced)
- revenue growth YOY of "inflation plus 6%" is good growth for a bricks-and-mortar business with no online sales.
- verify with tax records

etc.

Often irregularities will jump out at me, but I don't have a list that I go down and check things off but I imagine there is something out there.

The business I'm currently evaluating and fulfills maintenence contracts for specialised equipment organisations.

[bwall]

There can be many reasons why a small business would have large variations year on year. Some are reasonable, some are not.

The main thing to evaluate is the tax returns. "If it's not on the tax returns, then it didn't happen." is the best rule of thumb to go by.

If it's not a profitable business, then you probably don't want to buy it. If it is profitable, then you have to dig down and find out why they're really selling. After all, who would want to sell a profitable business that practically runs itself?

If you provide more detail, we can provide more meaningful feedback.

[Proud Foot]

Make sure to look at the cash flow statement also.  Cash flows will help provide more information about the revenues and overall health of the business. Capital intensive companies can have low to negative profits but strong cash flows due to different accounting rules.