WHAT A BALANCE SHEET REVEALS

Knowing how to read this financial statement can help you separate strong companies from struggling ones.

- PRACTICAL PORTFOLIO BY DAVID MILSTEAD

STOCK pickers typically want to own a company with a fortress balance sheet, not a flimsy one. This financial statement is worth looking at in order to decide whether to buy a new stock or keep the ones you own. It provides a snapshot of a company's financial health at a particular point in time, typically at the end of the quarter. Tage Tracy, the author of How to Read a Financial Report, says investors who understand a balance sheet can more easily see where a company may be weaker than its management claims. And yet, says Tracy, “the balance sheet is often overlooked.”

First things first. Why is it called a balance sheet? Because it lists a company's assets “balanced” against its liabilities plus its shareholders' equity—essentially, reflecting what the business has compared with how it was funded. The two sides always equal out.

There's a wealth of information to be gleaned for those who look closely. A quick peek at debt levels isn't enough. How much cash is there to offset the company's obligations? How does the debt compare with the company's earnings? How easy is it for the company to make the annual interest payments? The answers to these questions (and more) can help you weed out the sickly from the healthy.

We'll tell you what matters most and how to find it or calculate it. We used data supplied by S&P Global Market Intelligence, but you can find corporate balance sheets and other financial statements on a number of websites, included as part of a company's earnings reports and on file at the Securities and Exchange Commission. Balance sheet and other data here are as of August 31, except where noted.

THE RIGHT TALLY