Okay so now we're going to be revisiting The balance sheet which we talked about Earlier on in this course but rather Than analyzing your own balance sheet Which you should have done already we're Now going to talk about analyzing the Balance sheet of a company which is one Of the most important documents to look At and we're going to be talking about The three financial or the three income Documents that you should analyze when It comes to fundamental stock analysis The first one being the company balance Sheet so earlier we talked about the Importance of creating and analyzing Your personal balance sheet and now we Will be analyzing the balance sheet of a Company and as we said before just as a Brief recap the balance sheet is a Comparison of assets to liabilities so If you subtract their total liabilities From their total assets that gives you An idea of the net worth or in your case If you do this yourself this gives you An idea of your personal net worth so First of all we have assets so we'll be Looking at the items typically found Under the assets section of a company Balance sheet So you have current assets and then Non-current assets and we're going to Give some examples of these but current Assets are cash and other assets that Are expected to be converted to cash
Within one year While non-current assets are long-term Assets that a company expects to hold Longer than one year so the difference Between those is very simple Current assets they're going to be Converted into cash or they're currently Cash And that's going to be converted into Cash within one year and any non-current Assets these are long-term investments Or assets the company holds that are not Going to be converted into cash within That year Now The difference it's it really comes down To again think about asset liquidity Non-current assets are not as liquid and They're not readily convertible into Cash these are not things that you can Just go out and sell In an easy way they're not readily Convertible into cash so here are some Common examples of the current assets And the non-current assets you would Have listed on a company balance sheet So on the left under current assets cash And foreign currency any highly liquid Investments any accounts receivable or Inventory these are all things that are Currently in cash or expected to be Converted into cash within the next 12 Months And then under non-current assets this
Is the property this is the plant the Equipment this is the goodwill the the Intangible assets like the brand any Illiquid investments a good example of This would be any acquisitions and other Intangible assets so obviously if a Company has property or an operating Plant or equipment This is not something they're planning On liquidating into cash in the next 12 Months so it's considered to be a Long-term asset or in in this Terminology a non-current asset so it's Just good to understand the difference Between these things so when you're Looking at the balance sheet you Understand what a current asset is and What a non-current asset is and now We're going to look at the liabilities That you're going to find on the company Balance sheet so just like assets there Are both current and non-current Liabilities so current liabilities if You haven't guessed yet these are debts That are due to creditors within the Next year And non-current liabilities are Long-term financial debts that are not Due to creditors within the next year So we're going to look at examples of Both of these now so on the left the Current liabilities that are due in the Next 12 months this would be short-term Debt this would be accounts payable
Taxes and interest payable any declared Dividends so dividends before payment Are considered to be current liabilities And then maturing long-term debt so if There's any long-term debt that is Coming to maturity it transitions from Non-current liabilities over to current Liabilities because it is due within the 12-month period going forward and then The non-current liabilities the debt That is due further out into the future This would be your long-term debt your Bonds payable if the company has issued Corporate bonds any pension liabilities And then any deferred revenues taxes or Liabilities so again when you're looking At the company balance sheet and you see Current versus non-current liabilities These are items you would expect to see Under each of those So what are you looking at when you're Studying the balance sheet of a company What are the major things you should Look at And if you guys are trying to Wonder what you should be writing down These are very important things to write Down because i think this should be on Your list Of things that you're going to look for When analyzing a company balance sheet These are the things i consider myself And we're going to go over an example of This shortly number one our total assets
Growing each year because you're going To want to see assets growing Number two are total liabilities growing Each year and three is very important as Well Our liabilities growing faster than Assets because that would mean they are Taking on more debt than they are taking On cash or things that could be easily Converted into cash Number four Is inventory growing or shrinking you do Not want to see a company sitting on too Much inventory number five does the Company have enough cash to cover Current liabilities so one of the most Important things you want to consider is Whether or not the company has the Ability to pay off the debt or the Liabilities they currently have and You're gonna want to ideally have them Be able to cover their debt solely with Their current assets not just their Non-current assets Number six what type of assets does the Company own so are most of their assets Current assets that are currently in Cash or convertible to cash in the next 12 months or are most of their assets Non-current assets that are not readily Available in form in the form of cash And number seven is most of the debts Short term or long-term or current Liabilities versus non-current
Liabilities these are the seven Questions i ask myself when looking at The assets and liabilities of the Balance sheet of a company and i highly Encourage you guys to include some if Not all of these in your analysis of a Company balance sheet So the next section of the balance sheet We will discuss is the stockholders Equity now the stockholders equity is The net worth or what is left over when All liabilities are covered by the Assets so when you take the simple Equation of assets minus liabilities Equals net worth well net worth is also Known as stockholders equity and a General rule of thumb is that Stockholders equity should always be Growing and if it is not this may not be A financially healthy company to invest In So look at the stockholders equity over The last five to ten years and one thing That i always look for is consistent Double-digit growth in stockholders Equity over a long period of time Again remember it's very important to Find consistency because you may see a Company doing very well in the short Term but it's important for a long-term Investment to see a good track record Okay so now we're going to take a look At the balance sheet of google and i Will say they have one of the best
Balance sheets going so they were a Perfect example for this here and google Is one of my long-term investments And once you guys take a look at the Balance sheet here i think you'll Understand why i see they have a very Good very healthy balance sheet and They're very well run financially So this is what a balance sheet is Actually going to look like and i kind Of simplified this just for the slide Here to fit everything on here but this Is from Morningstar this was a morningstar view Of the balance sheet so if you go on Morningstar's website and look for their Balance sheets you'd be able to find the Balance sheet of most of the larger Companies but as you can see on the left Where those arrows are If you click on those arrows it will Provide you more of a breakdown but for Everything we're doing here i pretty Much just needed the overview of the Current assets versus the non-current Assets the current liabilities versus The non-current liabilities and then the Stockholders equity so As you can see one of the first things i Look for is our total assets growing and Total assets are growing consistently And it was a 15.7 percent year-over-year Return on average and what i look for is A double-digit return so that checks
That off on my box Then we look for total liabilities to See if they are growing and they are Growing at a much slower rate so total Liabilities are growing at 5.76 percent Year over year on average versus the 15.7 percent growth For the total assets and then we look at Stockholders equity again we want to see This growing at a double-digit rate and Over the last five years we're looking At here there has been an 18.8 percent Year-over-year growth of the Stockholders equity on average which is Fantastic and then another important Thing to consider was um whether or not Their current assets which as you Remember is what is currently held in Cash Or converted to cash in the next 12 Months covers their current liabilities So looking at fiscal year 2016 they had A 6.3 to 1 coverage ratio of current Assets to current liabilities which is a Great coverage so you always want to Make sure their current assets cover Their current liabilities and the Greater that number is above one the Better so six point three to one that is Fantastic coverage of the liabilities And then when we look at their assets we See most of their assets are current Assets which is good and most of their Debts are current debts as well so
They're not holding a lot of long-term Debt so this is an example of a Fantastic balance sheet this is one of The main reasons why i'm heavily Invested long term in google is because They just have a fantastic balance sheet So this is what you are looking for and This is an example of what it would be Like to go through and analyze The assets and liabilities of a company Balance sheet So now we're going to take a look at a Balance sheet that is not so good this Is rite aid so first of all the major Red flag if you look at stockholders Equity back in 2013 and 2014 Rite aid had negative stockholders Equity which is something you never want To see That means that their liabilities Exceeded their assets So then let's take a look at the current Fiscal year here and get an idea of Whether or not their current assets are Covering their current liabilities and As we said google's was well above six And when we look at rite aid their Coverage ratio is a 1.68 which is not a Very good coverage ratio so essentially Their current assets are just above Their current liabilities and you want To see a coverage ratio above that Figure there i i tend to want to see at Least above a two a two to one ratio of
Coverage of current assets to current Liabilities so one point eight not very Good coverage but then things get even Worse when we look at total assets and Total liabilities not just the current Ones And their total assets barely cover Total liabilities so in the current Fiscal year they have a 1.05 to 1 Coverage on total liabilities and then When you look at the assets you see most Of their assets are non-current assets So most of the assets they hold are not Assets they're looking to convert into Cash anytime soon or they're not readily Convertible into cash what we have Determined looking at this balance sheet Is that rite aid is drowning in debt They have way too many Current and non-current liabilities and They don't have healthy coverage of Those liabilities so this is not Something you'd want to see on the Balance sheet of a long-term investment Now i want to take what we just looked At and explain this more simply so let's Take a look at this and pretend that This was the balance sheet of your own House so let's say for example google is Your balance sheet and the balance sheet Of google is the balance sheet of your Own household you would have twelve Thousand nine hundred eighteen dollars Sitting in cash so your stocks would be
Your current assets you have ninety two Thousand four hundred ninety dollars in Investments that are easily convertible Into cash and then we're going to Consider your home equity is your Non-current assets these are your Long-term assets so you have sixty two Thousand eighty nine dollars built up in Home equity and then your credit card Debt or your Current liabilities is at sixteen Thousand seven hundred fifty six dollars So first thing we notice is your cash Just about covers what you have on your Credit cards but if you consider what Your short-term investments are that Would easily cover your credit card debt And your long-term debt or your Non-current liabilities is at eleven Thousand seven hundred five dollars that Would be like the mortgage on your home So all in all once you figure all of Your liabilities and your assets you are Sitting with a net worth of one hundred Thirty nine thousand thirty six dollars So if google was your own personal Balance sheet it'd be a pretty good Balance sheet now we'll take a look at Rite aid so if right aid was your own Personal balance sheet you would have 245 dollars in cash and then your home Equity what you have built up in your House or your non-current assets at 6528 dollars
Then we see that your credit card debt Or your current liabilities is at three Thousand dollars so your cash does not Come anywhere near covering your current Liabilities so you would need to sell Off some of your short-term investments In order to cover what your credit card Debt is and then when you look at your Mortgage or your long-term debt Obligations or your long-term or Non-current liabilities that's at just Under eight thousand dollars so if you Combine your cash And your current assets it will not Cover your long-term debt obligations so Once you do all the numbers on this if You were right aid you would have a net Worth of six hundred fourteen dollars Look at the drastic difference between These two balance sheets look at the Fact that rite aid has 245 dollars in Cash and that's almost that's all over a Third of their net worth is what they're Holding in cash that is not good when They have such a small amount of cash Versus google where their net worth is More than 10 times what they're holding In cash so this is a good way to see What a good balance sheet looks like and Then a lousy balance sheet and rite aid Has a very lousy balance sheet because They don't have a lot of current assets And they just have way too much debt They are drowning in debt so this is
What you want to look for in a balance Sheet you want to look for a balance Sheet closer to google then you would be Looking for a balance sheet closer to What rite aid has here
