Balance Sheets: The Good, the Bad and the In-Between

Negative net tangible assets: This is caused by an excessive amount of goodwill. Goodwill, or G/W, is the value paid by an acquiring company in excess of the book value of the acquired company. G/W sits on the balance sheet like an ugly mole and has to be amortized (expensed) over a period of time.

However, while G/W has an accounting value, it has no economic value. You cannot sell G/W or exchange it for cash. Thus, G/W has to be made up by successfully operating the acquired company. Net tangible assets is equity less G/W. All of the companies I mentioned have negative net tangible assets (below amounts in thousands):

• Six Flags: - $848,776
• Level 3: - $803,000
• Sirius: - $505,564
• XM: - $650,089

(Source: Yahoo! Finance)

Low current ratio: The current ratio is derived by dividing a balance sheet's "current assets" amount by its "current liabilities" amount. This ratio represents the ability of the company to meet its short-term obligations, such as accounts payables and current portion of long-term debt, from readily available sources, such as cash, short-term investments, accounts receivable and inventory.

A high current ratio indicates a liquid company. A low ratio indicates that the company will have problems meeting its short-term obligations, and it could spell more-significant problems. Look for companies with current ratios of at least 1.00 -- but to be on the safe side, add some room for comfort and look for a slightly higher ratio.

Sirius, XM and Six Flags all have low current ratios (see below), and this is not a good sign. And even though Level 3 has a current ratio of 1.44, it is saddled with a great deal of long-term debt, which is another red flag.

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