Fundamental Analysis For Dummies, 2nd Edition

Chapter 6

Measuring a Company’s Staying Power with the Balance Sheet

IN THIS CHAPTER

Calculating the size of a company’s financial resources using the balance sheet

Discerning the difference between a company that is financed by debt or stock

Realizing the importance of watching a company’s working capital

Gaining awareness of companies’ ability to water down your holdings with dilution

For many investors, following how companies are doing each quarter is almost a sport. Some investors may read about companies’ earnings and revenue, much like sports fans follow the track records of their favorite teams.

Knowing how well a company is doing, or how strong its business is operating, is an important part of fundamental analysis. But knowing about earnings and revenue, as discussed in Chapter 5, is just the tip of the fundamental analysis iceberg. Fundamental analysts not only know how much of a profit a company is generating, but also what kind of financial shape it’s in.

The balance sheet gives you everything you need to see how financially healthy a company is. A strong balance sheet, or one that’s rich in cash and low on debt, can help a company endure a severe but temporary downturn in its business. But fundamental analysis also highlights how some companies can afford to take on some debt in order to boost their returns to investors. Understanding how much debt is optimal is part of how fundamental analysts use the balance sheet.

In this chapter, you’ll take a tour of the balance ...