Hey Friends. I hope this post finds you well.

As you know, my book, “Choose Stocks Wisely,” emphasizes the key role the balance sheet plays in assessing risk. If one wants to see how sturdy a company is financially, how able to weather a financial storm, how able to take advantage of opportunity that presents itself, etc., that person will surely seek out the information found on the balance sheet. It can’t be found on the income statement or the statement of cash flows. These latter 2 reports give a person information on recent business activity that may provide some sense of a business’s future prospects and their possible impact to the balance sheet. But only the balance sheet says “here’s where things stand today.”

Looking at the economic landscape today against the present stock market backdrop, the balance sheet is more critical than ever in evaluating where one wants to plant financial resources. Massive national, corporate, and consumer debt loads; inflation threatening future earnings and growth; rising interest rates that accompany inflation and make debt servicing more tenuous; uncertainty over future pandemic circumstances, etc., all these threats pervade the macro and micro economic climate.

We see symptoms of heightened concern over where things are heading. In my opinion, the gold rush to cryptocurrency reflects the realness of the concern over fiat money — not just a belief in the practicality of digital exchange in a transformative technical world. There’s an increasing interest in precious metals as reflected by gold, silver, etc., prices. Strangely, amid all this, we see the risk seeker side of a stock market that thrives on living on the proverbial edge of the cliff. The Meme culture fueled by reddit conversation is now living well beyond the GameStop stock explosion.

More than ever before, I want very strong balance sheets behind my stock investments in this climate. That means an asset base that is all or almost all tangible and that has a significant portion of the total assets in current assets, preferably a relatively high cash position. It means a balance sheet not reflecting significant leverage (debt). While beyond the scope of this post, the nature of any debt is important — convertible debt, for example, gives the lender too much sway over the external stockholders. Yes, a careful evaluation of the balance sheet and periodic re-evaluations — as quarterly reports bring financial updates — has never been more important than now in my view. If we do face some kind of economic shock that presents a stock market shock, it seems sensible to be stationed in financial pockets that hold real substance and can likely withstand such shocks.

Whether holding stakes in stock market assets (common stocks) as investments or any other investment type, my admonition is to take the time to determine the financial health of that investment. That means look over the balance sheet. My book gives some guidance on how to put a practical eye to risk assessment via balance sheet evaluation.

See you next time.