Balance Sheets Matter Now More Than Ever

"Banks worldwide are hoarding cash in the face of weakening balance sheets, bank failures and an incredible demand from depositors for cash. The result: a complete breakdown in global financial markets," said Paul Kedrosky in Sunday's "Weekend Reading."

You probably already knew (or at least heard) the balance sheet was an important part of any company's health, but did you realize that the numbers on that fundamental financial statement have a direct impact on the credit crunch we're facing?

A Balancing Act

Balance sheets are basically listings of a company's assets (such as cash, receivables from customers and investments), liabilities (debts) and equity (stock owned by investors like you and me).

If you take out a loan to buy a car, your liabilities increase (because of the loan), and your assets increase an equal amount (because you now own a car).

The balance sheet is an important financial statement, because not only does it give you an idea of how much a company owns -- and therefore what it's worth -- it also lets you see what kind of financial trends the company is undergoing, when viewed over time. With the emphasis on liquidity these days (how quickly a company can get cash for its assets), understanding the balance sheet is essential.

You can bet that the balance sheet is one of the very first things analysts look at when they're trying to estimate a stock's value.

When the subprime loan debacle first hit a year ago, financials such as Citigroup (C) and Merrill Lynch (MER) wrote down billions of dollars of bad debt that had once been assets on their balance sheets, and their stock prices plummeted as a result.