Both Sides Now (Part 1)

Investors need to use both sides of their brains.

Yes, there’s the analytic side and the intuitive side. There’s numerical number-crunching and there’s aha-moment insight, the kind that gets into Apple at 30 and out of Google at 600. But that’s not the two-sidedness that I’m talking about.

I mean the balance sheet. Yes, that boring, accounting-level statement of what a business owns and owes. The statement of cash, receivables, inventory, property and equipment on one side, and payables, short-term loans, long-term loans, and equity on the other side: assets and liabilities—both sides.

For a long time the balance sheet was the Rodney Dangerfield of accounting: it didn’t get no respect. After the dot-com bust and Enron scandals analysts focused on earnings and cash-flow, respectively. But it took the financial crisis to raise the prospects of the balance sheet.

The balance sheet gives you a picture of financial health. Assets—and especially liquid assets—indicate how well a company can deal with stress. And liabilities, and particularly short-term borrowings, show where that stress might come from. When short-term loans are too high relative to cash and other liquid assets, creditors can shut down a company just by walking away. During the Depression some banks had three-quarters of their assets in cash, not because they were sick, but because they were healthy, and wanted to remain so.

The truth is, all three statements are important: earnings, cash-flow, and the balance sheet. In combination, and over time, they show what’s going on inside a firm. But it’s the balance sheet that shows the imbalances.

By |2019-02-20T09:40:38+00:00March 27th, 2012|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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