Fundamental Stock-Picking: Balance Sheets Matter

From the Bear Stearns BSC meltdown (see Liquidity Problems Slaughter Bear) to Visa's V initial public offering (see Visa IPO Charges Ahead), balance sheets matter. To get up to speed on how to read a balance sheet, the following are a few good starting points.

From Cramer's 'Mad Money' Recap: The Bear Stearns Fiasco:

"After this selloff," Cramer told viewers, "investors should pick amongst the rubble for the real banks."

The real banks, he said, are not banks at all but rather recession-proof companies that are flush with cash.

Cramer recommended companies in the "real" economy such as those that manufacture products. These companies, which all benefit from a weak dollar, include Procter & Gamble PG, Colgate CL and Pepsi PEP.

Cramer also recommended strong companies in the tech sector, such as Cisco CSCO, Intel INTC and Apple AAPL.

"All of these companies also have strong balance sheets," said Cramer.

Read the full article.

---

From Getting Started: The Balance Sheet:

A company's assets consist of anything it owns that has real financial value. The liabilities and shareholders' equity (also known as owners' or stockholders' equity) section represents the ways that those things were paid for. Liabilities are anything that a company owes to someone else; bank loans and bond issues are common examples.

Shareholders' equity consists of the company's stock (the kind you might have in your own portfolio) as well as the income the company holds onto from operations, called retained earnings. Each of these -- liabilities, stock proceeds and retained earnings -- can be used to purchase the assets listed in the other section of the balance sheet.

Read the full article.

---

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

In this installment of The Finance Professor, I'll cover how to diagnose the three degrees of a company's financial health, by looking at various companies with strong balance sheets, weak balance sheets and balance sheets that are "under improvement."

Read the full the article.