Wednesday, March 17, 2010

Balance Sheet Reading for Stocks

Especially look for liquid assets in a Balance sheet. (Liquid Assets are that can be easily converted to cash). The amount of liquid assets a company can amass ultimately determines its value. Better yet, if a company generates more liquid assets than it needs to fund its operations, it can give the excess back to shareholders in the form of dividends or share buybacks.

There are two ways to measure liquid assets. The first is terminal value -- how much the company would return to shareholders if, at some future point, it closed down all its operations and turned everything into cash. The second is tangible shareholder value -- the returns on invested capital generated by the company's operations.

The balance sheet can tell you whether a company's got enough money to keep funding growth, or whether it'll have to take on debt or issue bonds or additional stock to sustain itself. Does a company have too much of its money tied up in inventory? Is the company collecting money from its customers reasonably quickly? The balance sheet knows all.

The Securities and Exchange Commission (SEC) and its EDGAR website give you all sorts of balance sheet information in a company’s 10-K and 10-Q reports.

The 10-K is a toned-down, once-a-year version of a company's annual report, with more text and fewer pretty pictures; it contains the company's balance sheet for the entire fiscal year. The 10-Q is a quarterly filing that a company makes with the SEC three times a year (the fourth yearly filing is the 10-K). The 10-Q reports also track a company's balance sheet through the course of the year. Note that unlike its quarterly compatriots, the 10-K's balance sheet is double-checked by accountants before it's filed with the SEC.


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