Article Information

How to Evaluate a Firm
Buchele, Robert B.
5/1  (Fall 1962): 5-17

This article focuses on methods for the evaluation of firms. Financial analysis is typically consists of studying a spread of profit and loss figures, operating statements and balance sheet ratios for the past five or ten years. The underlying assumption is that the future performance of a company can be reliably projected from trends in these data. The reasoning is that these data represent the "proof of the pudding." In practice the financial analysis method is often supplemented by market research in the form of interviews with leading customers, by interviews with the firm's top executives, and by consultation with scientists capable of evaluating technological capabilities and trends. While these supplementary activities help, financial analysis still is neither adequately comprehensive nor adequately oriented to the future. Systems more comprehensive than the financial analysis method have been developed, mainly by consultants seeking to understand firms' overall strengths and weaknesses in order to be able to prescribe for them. Such systems typically involve ratings based on a series of key factors underlying the financial factors themselves. Little has been published about these systems because the consulting firms regard them as proprietary secrets.

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