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Market Research

Balance Sheet Analysis

The two corporate financial statements that contain most of the information used in this investigation are the Income Statement and Balance Sheet. Data is publically available unless stated otherwise.

The Balance Sheet summarizes the financial transactions of a company from one moment in time to a next. All the transactions of the Income Statement will be summarized into the Balance Sheet. Profit, hence capital, is reported as Net Worth. Insolvency is when Liabilities are greater than Assets. An important measure of organization success is having a Fair Market Value many times larger than Net Worth.

Assets = Liabilities + Net Worth

Assets: A growing company has to build assets to support increasing revenues. Assets can be one of three types: Current, Fixed or Other. All Assets are valued at the lower of cost or Fair Market Value.

Current Assets: All Assets with an expected life of one year or less. The major categories of Current Assets are:

Cash and Marketable Securities: The most liquid Assets. A critical buffer to protect against cash flow problems.

Accounts Receivable: Uncollected Revenues. Accounts Receivable are always reduced by a reserve for Receivables judged uncollectable..

Inventory: Direct Costs on hand to meet incoming orders. There are three broad categories of Inventory: Raw Material, Work-in-Process and Finished Goods. The values of Work-in-Process and Finished Goods include the costs of Direct Labor incurred and an estimate of other indirect production costs called Burden. The inventory policy of a company depends on how fast a company wants to ship Product after receipt of customer orders.

Fixed Assets: Plant, property and equipment. Net Fixed Assets are Assets reduced by Depreciation, the period expense of writing off the value of an Asset over its estimated useful life. Land is also a Fixed Asset but is not depreciated.

Other Assets: A catch all category for all Assets other than Current and Fixed Assets. Ignorable in this investigation.

Liabilities: As with Assets, Liabilities are sub-divided into Liabilities that must be settled in less than one year, Current Liabilities, and those with a maturity of greater than one year, Long Term Liabilities.

Current Liabilities: For our purposes, Current Liabilites will be one of four   types.

Accounts Payable: Amounts owed to vendors. Favorable terms from vendors is an important source of financing.

Employee Costs Payable: All Employee costs owed but not paid. Includes payroll, commissions, vacations, payroll taxes and sick leave.

Taxes Payable: Federal and State corporate tax liability not paid.

Debt Payable: Bank or other borrowings that must be paid within one year.

Long Term Liabilities: Liabilities that do not come due in less than one year.

Net Worth: There are two sources of Net Worth or Capital: the sale of stock or Profits. All shareholders are motivated to minimize the sale of stock and look to the company to earn Capital through earnings; the less stock sold, the more of the company owned by existing shareholders. Net Worth is minimally reported as one of three categories:

Capital Stock: The par value of all outstanding shares of Common and Preferred Stock. The par value represents a minimum value placed on the stock by the company. Par value of common stock is usually $.01 per share.

Capital Surplus: The value actually received by a company for the stock it sells or distributes less its par value. The sum of Capital Stock and Capital Surplus equals the value of the Capital raised by the company from selling or distributing stock.

Retained Earnings: Retained earnings are the cumulative Profits and Losses of the company. In the early years, when a company pays expenses from capital raised from selling stock, Retained Earnings will be a negative number. If the negative Retained Earnings grow to be greater than the Capital Stock and Surplus, the company is insolvent.

Working Capital:  Working Capital = Current Assets - Current Liabilities
A measure of the Capital required to finance the growth of Current Assets to grow the business. The essential relationship within Working Capital is: Accounts Receivable + Inventory - Accounts Payable - Debt Payable. A company that grows rapidly must grow its Working Capital to sustain its ability to ship Product.

Company Value: The primary method used to value companies in this investigation is the extension of the number of shares of stock outstanding times the current fair market value of a share of stock. The greater the company value to the Capital Stock and Surplus, the better the company has been as an investment.