[1940] Ch. 45 BALANCE-SHEET ANALYSIS (Concluded)
8 months, 2 weeks ago

Summary:

Comparing balance sheets over multiple years can provide important insights into a company's financial health beyond just looking at the income statement. It can reveal issues with reported earnings per share, the effect of losses/profits on financial position, and long-term trends in earning power and financial resources.

Large short-term debt, especially bank debt, is often a warning sign of financial weakness. Maturing debt can also create critical financing issues if operating results are poor.

Shrinkage in inventory value during downturns is not necessarily an operating loss if it just reflects lower prices, not less physical volume. But inventory inflation during booms can overstate profits.

For industrials, a minimum 2:1 current ratio (current assets to current liabilities) was a standard measure of financial strength, but companies now tend to maintain higher ratios. The acid test ratio (cash and receivables to current liabilities) is also relevant.

Public utilities and railroads are not held to standard working capital requirements.

Comparing balance sheets over time for a company can reveal issues like overstatement of earnings, effects of losses on financial position, long-term trends in profitability, and changes in financial resources. Helpful to do a decade-by-decade analysis.