Checking the Balance Sheet for Stock Valuation

Checking the balance sheet for stock valuation of a company is one part of making an informed investment decision. It can help gauge how well a company is doing by determining how much debt or surplus a company holds. If a company has a lot of debt on its books, then a prudent investor might not even look at making an investment. However if the company is profitable, then the same investor might decide to invest their dollars. Billions of dollars, and entire companies, can either be created or destroyed by their balance sheets. For example Google and Microsoft were created, and Enron was destroyed.

How it Works

A balance sheet is an itemized description of the assets and liabilities of a company. This, along with factors like earnings, price/earnings ratio and alpha comprise what is known as fundamental analysis. It is one of the two schools of analysis that Wall Street and Main Street use when they want to put their money to work. 

Terminology, such as accounts receivable, costs of goods sold, net expenses and net income are found on balance sheets since they will compare the different sources of income and expenses in a given year. They are also audited in compliance with federal legislation such as Sarbanes-Oxley so that investors can be confident that they are not being misled. If a company is misleading according to its financial statements, the consequences are often severe. Investors can lose confidence in not just the company in question but also of other companies as well, thus creating a crisis of confidence that can rattle financial markets.

What Does It Mean?

Investors looking at a balance sheet will not only find the current status of a company but also future projections as well.  Manufacturing companies, for example, will show inventory that has been sold. This is very important because it demonstrates that the company is not only selling but will continue to sell its products in the future. The information is crucial information for a long term investor. 

The balance sheet can also indicate if the company needs to cut costs, especially during leaner economic times. In addition to whether or not a company needs to trim costs, a balance sheet can also decide if the company needs to expand. If new facilities are to be produced and new workers need to be hired, then the balance sheet plays an even bigger part due to the economic realities that expansion of the economy brings. 

When companies are able to produce well articulated reports it allows investors to either hold their money on the sidelines or commit it to the marketplace. Furthermore, it allows the workers of the company to see what their labor brings to the table. If a worker sees that the company is doing well, the worker is more inclined to be happier and hence more productive than if they are laid off. It can easily be said that a balance sheet is more than just a collection of numbers and can be compared to a person having a clean bill of health.

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