Meet your new best friend – the balance sheet
The balance sheet is the essential statement for business reporters.
It’s packed with information you need to understand a company’s health and longevity. It’s so important, in fact, that we spent at least an hour reviewing its properties in SABEW’s “Early Bird Accounting” session.
So once you have a balance sheet in hand, where do you begin? Start by looking at a company’s cash.
As Tom Contiliano, head of internal financial operations for Bloomberg News, writes in his handout, “Cash is king. Companies that lose cash simply do not exist for long. Cash is easy to verify and understand and is the basis of credit analysis, bond ratings and a host of key financial decisions.”
Remember if a company is holding a ton of cash, this is an important indicator. Why are they not investing this money for a return?
Google is a company with a large amount of cash on its books. Contiliano says the company says it has so much cash because it generates so much money it can’t spend it fast enough.
No matter the reason, it’s important when the cash column is huge to dig deeper to determine what it says about a company’s strategies for the future.
Once you move on from cash, keep in mind the geography of a balance sheet. Understanding the structure provides a road map through the numbers and helps you understand where you are going. Keep in mind that all items are listed in order of liquidity. The liabilities listed will show up first.
Contiliano said the “Rosetta stone” of the balance sheet lives at the bottom of the document in the equity numbers. That data helps you determine how solvent a company is.
“All that separates a company from being insolvent is owing more than you own,” he said.
Kelly, you are right on the money (literally). So few people understand the role of the balance sheet. I like to use the analogy that the income statement will tell you how fast you just ran the race at the track meet, but the balance sheet is like a comprehensive physical from your family doctor. Companies may post impressive results in the race, but the balance sheet can often point out that they are about to fall over with a heart attack. Nice post.
Joey, thanks for writing. I completely agree. Thanks to a great session from Tom, I was reminded again about the balance sheet’s vital role in our coverage.