Often, businesses need to be valued for variety of reasons, like sale/purchase of business(es), determine stakeholder value, demergers, closures and legal purposes.
Business valuation can be done through different ways like Asset approach, Market approach & Income approach. Albeit whichever method adopted, financial analysis is a pre-requisite to arrive at a fair valuation.
Financial Analysis typically comprises of ratio analysis (liquidity, debt, turnover, profitability, etc.), trend analysis and industry comparative analysis. The financial statements of a firm allow one to view patterns of growth and decline of the business at different points in time and thereby infer certain financial trends and patterns. These are used to evaluate financial performance basis which forecasting can be done for future performance of a given business. These together with valuation tools and techniques are used to derive value of a business.