The Finance Professor
Balance Sheets: The Good, the Bad and the In-Between
08/01/07 - 01:51 PM EDT
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
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
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
.
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