How to Analyze Future Prospects of a Company

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A review of financial documents, industry trends and the state of the current economy helps with analyzing the future prospects of a company. A key to the most accurate analysis is having access to complete financial data. People considering purchasing or investing in a business should not do so without a thorough review of profit-and-loss statements and related documents. Startup companies without an established track record are judged on their business plan and the overall opportunity based on the state of the specific industry and success of similar, established companies.

SWOT

  • A SWOT analysis is a commonly used tool for evaluating businesses. SWOT stands for strengths, weaknesses, opportunities and threats. Create the SWOT by listing bullet points under each heading. For example, let’s say you’re analyzing the future prospects of a fast-food restaurant known for its inexpensive hamburgers. For that company, under strengths you might list popularity and low prices. Under weaknesses you might list limited menu items or low barrier to entry for future competitors, and so on.

Balance Sheets

  • A balance sheet is a financial document providing a broad look at a company's current position and its immediate prospects. Ohio State University reports that a balance sheet shows a company's ability to satisfy creditors; manage inventory, services and expenses; and collect receivables. People considering buying a company should review balance sheets and full financial information. That's often possible by signing a nondisclosure agreement allowing full access to the information. During the due diligence process, analyze future prospects for the company by tracking revenue versus expenses over the past three years. Future prospects for a company are usually good if revenue shows year-over-year growth and fixed expenses such as labor costs are relatively stable or declining. Also analyze the company’s debt and access to capital. A company with good revenue growth but heavy debt and little access to capital may not survive an economic downturn.

SEC Reports

  • Earnings reports offer excellent information on publicly traded companies. Publicly traded companies must file quarterly and annual financial reports with the Securities Exchange Commission. Analyze the future prospects of these companies by tracking quarterly results for cash flow, revenue and net income. Publicly traded companies must also report information such as legal proceedings and risk factors. This information is often invaluable in analyzing future prospects. For example, a newspaper chain rapidly losing print subscribers because of the Internet must make potential investors aware of the challenge and what the company is doing about it.

Other Options

  • Other information on companies is sometimes available by interviewing employees of the company. While this is not always possible, access to employees can reveal an insider's view about the state of the business and its prospects. Similar information is sometimes available from employees or owners of similar businesses competing in the same market. News reports for publicly traded companies may provide even more information.

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