chapter  7
26 Pages

Financial analysis of entrepreneurial firms

Introduction Most firms tend to focus on generic financial indicators to measure financial performance and value creation. This reliance on financial indicators is generally reflective of corporate concentration on the attainment of quarterly financial targets such as revenue, profits, earnings per share, and so on. While it is important to understand and to be able to apply these general financial indicators, it is also imperative to recognize that value creation may not always be captured by them. Value may also be generated through business activities, which can be more difficult to ascertain by financial measures. Value is normally generated by making the right bets on the right market, developing a strong management team, operating the right business model, securing a growing market share, and so on. In Chapter 3, we mentioned that financial indicators sometimes only reveal part of the entire value creation picture; this point is worth reiterating here, as well. Although financial indicators continue to be an elementary measure of financial performance, they are only representations of historical business activity; they quantify the aggregate effect of many factors (those that are immediately obvious and those that are more difficult to ascertain). As noted, the true extent of value creation activity may not be immediately visible within conventional financial analysis.