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

To recap, total current assets divided by total current liabilities equals current ratio:

• Six Flags: $155,308 / $496,294 = 0.31
• Level 3: $1,504,000 / $1,043,000 = 1.44
• Sirius: $479,802 / $750,702 = 0.63
• XM: $432,658 / $694,322 = 0.62

(Source: Yahoo! Finance)

Be careful, though, with the current ratio. While it can be helpful if you're doing a quick scan, you still need to dig further into a company's balance sheet. Also, the current ratio will vary among different industries. For example, within aerospace, Boeing (BA Quote) has a current ratio of 0.79, but I would hardly consider Boeing to have a bad balance sheet.

How to Spot a Strong Balance Sheet

It would be easy to state that a strong balance sheet has none of the problems of a weak balance sheet, but that is not necessarily the case. There is nothing wrong with having G/W, and G/W appears on some fantastic balance sheets. It is the magnitude of G/W in relation to the company's overall balance sheet that separates the financially strong companies from the financially weak ones. Certainly, a high current ratio would be a welcome sign of a good balance sheet. Again, you need to be careful to only use the current ratio as a starting point.

So what are some of the other standout metrics of a good balance sheet? Here are a few key indicators of strength:

• Cash and short-term investments
• Low or zero long-term debt
• Undervalued assets

Cash and short-term investments: Nothing signals a strong company more than piles of cash and short-term investments (such as CDs or T-bills ). This will not only provide coverage for the payment of current liabilities, but it will also give a company the ability to return value to shareholders. How? Companies can return the cash to shareholders through stock repurchases and dividends .