I’ve received several e-mails from readers of my book, Choose Stocks Wisely, who have observed that financial companies don’t have the subtotals for “current assets” and “current liabilities” on their balance sheets. These amounts are required as inputs by my Adjusted Floor Price Scorecard, specifically to complete Part A on testing for adequate liquidity.

Further, two of my finviz.com screening filters are the quick ratio and the current ratio. Both of these ratios require that the current asset and current liability amounts be available. Thus, banks and other financial companies will not satisfy my screening filters due to “lack of available data.” Keep in mind, to run a finviz screen which can potentially yield financial company stocks among non-financial company stocks, any filter that depends on a current/non-current balance sheet account breakout must be excluded as a filter.

Financial companies are a different animal in that they are moneychangers. They don’t deliver a product or service in the normal business sense. Since the balance sheet composition of financial companies basically revolves around monetary resources and obligations, generally accepted accounting principles (GAAP) does not require the current/non-current breakdown of assets and liabilities on the balance sheet as with non-financial entities.

We all witnessed the bank failures of several years ago where many banks were overwhelmed by sub-prime assets included on their balance sheets. So, an attempt at liquidity analysis is still essential, in my view, even though it is made more challenging by the lack of a current/non-current breakout. I personally won’t invest in any company where I can’t evaluate liquidity (the ability to pay day-to-day bills as they come due). Thus, attempting to assign some portion of the total assets of a financial company as “current assets” and some portion of total liabilities as “current liabilities” is an essential endeavor, in my view, to ascertain something about a financial entity’s ability to pay its bills in a timely manner.

Note that with regard to the Scorecard, only Part A which addresses liquidity using my adjusted current ratio is impacted by the absence of the current asset and current liability subtotals on the balance sheet of financial companies. The remainder of the Scorecard is carried out, even if you don’t provide the current asset and current liability inputs. That is, the Scorecard can check for adequate solvency (Part B), determine the initial floor price (Part C), and determine an adjusted floor price (Part D) “without” the current asset or current liability inputs. However, Part A needs those inputs to give the company a pass or fail on liquidity assessment.

Is there any way to complete Part A then? It takes a little ingenuity. The largest asset on the balance sheet of financial entities is “long term investments.” We must simply assign some portion of this account to current assets (specifically to non-cash current assets) in order to complete Part A. Personally, I would choose a percentage that is no greater than 40 percent of the long-term investments to assign to the current asset total.

The most efficient online source I’ve found for finding the balance sheet information of financial companies provided in a manner to facilitate a manual breakout of assets and liabilities into current and non-current components is yahoo finance. I’ll describe the breaking out of current and non-current with Bank of America (BAC). The following link will take you to yahoo’s balance sheet page for BAC.

http://finance.yahoo.com/q/bs?s=BAC

Going to the linked page, you will note that yahoo has a line for “Total Current Assets” and a line for “Total Current Liabilities.” These subtotal lines are completed for non-financial companies at yahoo, but, again, the breakout of current and non-current is not required under GAAP for financial companies. To complete the total current asset line for BAC, simply tally the items showing under the current asset section and then add some conservative percentage (you decide) of the long term investments to that tally. To complete the total current liability line, simply tally the items showing in the current liability section. Doing this will give you the current asset and current liability amounts needed as inputs for the Scorecard in order for Part A to be completed.

I believe evaluating liquidity before investing is worthy of the slightly extra effort demanded, if you choose to invest in financial companies. Finally, I will present a FAQ here at the website to direct attention to this post. Although a bit technical, I hope you find this post helpful.