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Negative
• Acme is highly dependent on the three family members who hold the top management
positions.
• Acme‟s products face a high degree of competition.
Financial Statement Analysis
An analysis of a firm‟s historical financial statements is usually needed—unless it is a start-up
business—as the past is often a basis to forecast future earnings. If a firm has had high growth in
recent years, that might indicate future growth potential. If past earnings have been volatile, this might
be a signal of risk for a buyer. While an analysis of the financial statements is important, valuation
does not stop with only looking at the firm‟s past performance. The goal of an analysis is estimating
the firm‟s future earnings since that is what a buyer is looking to receive.
Balance Sheet Analysis
Victoria prepares Exhibit 16.1, which is a summary of Acme‟s historical balance sheets in condensed
form for the most recent five years.
She finds that total assets grew an average of 15% per year over the five years and a similar amount
in the most recent year. The current assets consist mostly of accounts receivable and inventory.
Moreover, fixed assets mostly consist of land, buildings, improvements, machinery and equipment,
factory construction in progress, and transportation equipment. As of the most recent year-end,
Acme‟s depreciable fixed assets were amortized to 48% of their original costs.
The most recent year reflects unamortized intangible assets, consisting mostly of goodwill that is
related to Acme‟s purchase of a plant.
Current liabilities consist of accounts payable and the amounts due within the next year on
promissory notes and capital leases.
Acme is moderately leveraged from borrowings. During the past five years, Acme‟s interest-bearing
debt—both current and noncurrent portions—increased from $6.6 million to $10.4 million. Debt
consists of real estate mortgage notes, term loans, a revolving line of credit, and obligations under
capital leases.
Over the past five years, the shareholders‟ equity increased from $6.7 million to $11.4 million.
Shareholders‟ equity decreased slightly as a percentage of total liabilities and equity over the past five
years.