How to find a great investment opportunity by looking at a company's balance sheet
When it comes to trying to find a worthwhile investment opportunity, it can be difficult knowing where to start your research. But if you uncover a company with a great balance sheet, you could be well on your way to uncovering fantastic investing opportunity. Read on to uncover what you need to look for…
There are certain financial clues that indicate a company is worthy of your investment, Dan Ferris in S&A Digest
A company that has good levels of free cash flow
and rewards its investors with dividends
is a good starting point.
But if you find a company with these attributes and a great balance sheet, you could be on to a company that could continue to dominate its industry for years.
High-quality companies that have "fortress" balance sheets either have so much cash... or generate so much cash every year... there's very little chance they'll ever run into any financial problems.
And these "sleep at night" companies still have tremendous upside potential...
A company’s balance sheet
The balance sheet is a financial statement that shows a company's assets and liabilities. Assets are what it owns, and liabilities are what it owes.
There are two kinds of great balance sheets you should look for when finding a company that could potentially double or triple your money.
The first is a company that has an enormous amount of cash and relatively little or no debt. You can recognize a company like this in 30 seconds or less.
Debt isn't always a deal-breaker, though – which brings us to the second type of great balance sheet to look for...
In short, sometimes a company has more debt than cash... but the business is so good that it earns enough to easily cover the debt payments.
If a company has a lot more debt than cash, but generates well in excess of that in sales, then you could still be onto a good thing.
So to sum up:
Look for companies with great balance sheets.
Some companies have a lot more cash than debt. That's a great balance sheet.
Other companies have more debt than cash. But because they earn so much money, their debt payments are easily covered. This, too, makes for a great balance sheet.
So there you have it, how to find a great investment opportunity by looking at a company’s balance sheet.