5 Important ways historical financial statements are used in a business valuation

1.5 min read.

Business valuations are typically based on a company’s future performance, but valuators often use past financial information, such as financial statements, as a starting point for their analysis. There are several reasons for this:

1. Historical financial data provides a baseline for understanding a company’s past performance and identifying profitability trends. This information can be used to project future financial performance, and can also be used to identify potential risks or opportunities for the company.

2. Financial statements, such as income statements and balance sheets, provide a snapshot of a company’s financial position at a specific point in time. This information is crucial for determining a company’s working capital position (negative or excess), debt (under or over leveraged) and profitability, which are important factors in determining a company’s value.

3. Financial statements are also used to assess the quality of a company’s earnings, as well as the company’s ability to generate cash flow, which is another important factor in determining a company’s value.

4. Financial statements are considered as a primary source of information for valuators, and are also considered as a requirement for many legal and regulatory purposes.

5. Financial statements provide a level of reliability and comparability. They have been prepared in accordance with Generally Accepted Accounting Principles (GAAP), which makes them a reliable source of information for valuators. They also allow valuators to compare a company’s financial performance to industry averages or similar companies.

It’s important to note that while past financial information is a critical component of a business valuation, valuators will also consider other factors such as market conditions, economic trends, and the company’s competitive position to arrive at a value that represents the company’s future performance potential.

To learn more about business valuations, check out our process here or contact us.