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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Understanding Financial Statements Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Balance Sheet Analysis

 - Leverage and financial
   strength affect share value

 - Liquidity concerns can
   decimate a business

 - Cash is critical, to a point
    * Window Dressing
    * Cash Gap
    * Cash per Share
    * Burn Rate

 - Marketable Securities

 - Receivables are interwoven
    with cash flow
    * Past Dues and Write-offs
    * Receivables turnover ratios
    * Securitizations

 - Inventory - focus on the
   profit margins
    * Perpetual vs. Periodic
       Inventory
    * Inventory Accounting
       Calculation
    * Inventory Costing Methods
    * Lower of Cost of Market
    * Inventory Categories
    * Inventory Turnover Ratios

 - Fixed assets are necessary in
   order to be a world class
   company

 - Liabilities with equity attributes
   are enriching

 - Emphasizing debt net of cash
   can be misleading

 - Book value is a tool to
    properly evaluate a stock

 - Off-balance sheet assets and
   liabilities are legal

 

 


Emphasizing debt net of cash can be misleading

Many companies have a combination of cash balances and bank debt for various reasons. In an effort to show themselves in a stronger position, more and more companies are reporting debt net-of-cash balances. In some cases the presentation is fine. For example, financial companies often have tons of cash on their balance sheets, but most of it is often restricted to payoff its debt holders. This is an instance where a debt net-of-cash calculation is appropriate. The intended use of the cash should dictate how management reflects it on financial reports. If the purpose is to eventually pay down debt, then a debt net-of-cash presentation is fine. If, however, the use of cash is restricted and/or intended for other purposes, then a debt net-of-cash calculation may be inappropriate.

Moreover, if there is no intent to pay down debt, showing a net debt calculation is actually misleading to investors.

 

 

 

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