Open the Balance Sheet to read it.
1. FIND THE OVERALL CASH POSITION
Look for Current Assets to find out the company overall cash position – add cash and cash items plus marketable securities together. Compare the cash this year with the cash positon in the previous years.
Stocking more and more cash over the years is a sign of prosperity.
Look for Long-Term Debt. Compare it with last year’s long-term debt and previous years.
Debt reduction is another sing of prosperity.
Subtract the long-term debt from cash to arrive at Net Cash position. More cash than long-term debt means an improving Balance Sheet. Less cash than long-term debt means a deteriorating Balance Sheet.
* Ignore Short-Term Debt. Company’s other assets such as Inventory or Debtors should be valuable enough to cover the Short-Term Debt.
2. FIND THE NUMBER OF SHARES OUTSTANDING
Now look for Shares Outstanding. The positive step is when a company is reducing the number of shares outstanding over the years by buying back its own shares.
3. CALCULATE NET CASH PER SHARE
Divide the Net Cash position (cash and cash items + marketable securities – long-term debt) by the number of Shares Outstanding to find out Net Cash Per Share, which is how much cash goes along with every share of the company.
Overall cash position > long-term debt. The business should be buying back shares. It should also have plenty of cash per share.
When cash is shrinking and debt is growing – the company is in weak financial shape.
When debt is shrinking (or there is no debt at all) and cash is growing – the company is in strong financial shape.
