Comments on: How to Master Analyzing the Balance Sheet

By: Jae Jun

Jae Jun — Fri, 25 Dec 2009 18:04:50 +0000

Hey Ankit,

I think shorting is for only those that have guts and have the captial. I sure don’t want to be caught in a squeeze. Could end up losing everything even though I may be right.

I agree with you also on debt and dividends. I don’t like companies that continually distribute or raise dividends just because they have always done it. If they are in a difficult decision, the smart thing would be to pay debt rather than pay shareholders.

By: Ankit Gupta

Ankit Gupta — Thu, 24 Dec 2009 20:26:47 +0000

I thought I’d make 2 comments here:

1. Sometimes, analyzing balance sheets and finding bad things is good – you can always short a stock. So if you find a company that makes designer jeans that sell for $300+/pair, and they’re out of fashion, yet their inventory is piled high, there might be a good shorting opportunity if the clothes don’t move at the price they expect them to.

2. On the topic of debt – maybe I’m just very picky, but when a company has debt and is issuing dividends to stock holders, that’s a situation I don’t like. Opportunity cost says you could have paid down the debt before issuing a dividend, and so you’re essentially taking out debt to issue dividends, which doesn’t make sense. This unfortunately rules out a lot of companies for me, but I just don’t like it.

By: Jae Jun

Jae Jun — Thu, 19 Feb 2009 17:20:14 +0000

Thank you Phil B. There are plenty of other things to look for but hopefully I’ve covered the important aspects to help others in getting started analyzing the financial statements.

By: Phil B.

Phil B. — Thu, 19 Feb 2009 15:31:21 +0000

I think in a short amount of space you highlighted key issues affecting CC and what to look for. In my finance class I teach I use Best Buy and Circuit City financials to show good and bad examples when comparing like companies on the income statements, balance sheets and statement of cash flows. CC death warrant starting being written as far back as early 2007 before the crisis even hit and we have been talking about it filing for bankruptcy since the beginning of 2008. It is amazing how often the warning signs creep in well before the company disappears. nice summary analysis here and good example to show students.

By: Jae Jun

Jae Jun — Mon, 09 Feb 2009 04:28:47 +0000

True, Circuit City’s receivables isn’t on the bad side but I couldn’t think of a company that had the works. Sorry about that.
But the point of the post is to watch for the warnings signs. This includes receivables vs sales.

By: Mark Spiegel

Mark Spiegel — Sun, 08 Feb 2009 14:23:14 +0000

This company is a pretty poor example to use in regard to “receivables”. If you read the company’s last 10-Q, they only had around 12 days of sales outstanding in A/R, most of which was from the credit card companies. Think about it: who else would really owe them money? A customer would go in there and buy something with either cash or a credit card, and a few days later, Circuit City would get paid by either Visa or Mastercard or Discover or Amex.

By: Jae Jun

Jae Jun — Tue, 03 Feb 2009 14:39:38 +0000

Hi BP,

I did mention off balance sheet liabilities. I didn’t go through the entire report but I was pretty sure something like that would be in there.

By: BP

BP — Tue, 03 Feb 2009 13:46:13 +0000

You omit probably the biggest reason the company went bankrupt which are the Operating Leases that don’t appear on the balance sheet. This is a huge hidden liability that sinks (and will sink) many retailers.