Qualitative Aspects to Balance Sheet Assessment

Date Added: November 8, 2018 | Comments Off on Qualitative Aspects to Balance Sheet Assessment | Filed under: Blog

From time to time there are circumstances that could cause one to consider investing in a Company that has a significant amount of debt or a weak balance sheet.

Let’s look at a couple of examples.

Let’s say a Company has a large amount of debt relative to the equity in the business. Generally this would be perceived as “risky”. However, what if the debt had been issued by a government agency whose mandate was both earning a return on their investment as well as promoting jobs in their region, and what if the Company in question was a major employer. Furthermore, what if the debt had a maturity date 8 to 10 years down the road (enough time for a full business cycle). Given the time to maturity and the split motivations of the institution providing the debt, (investment return and jobs) one might consider this a unique situation wherein the time to maturity and the split interest of the debt provider made for a less risky situation than superficially would seem the case.

Or, how about a Company that has a weak balance sheet ( a user of cash say on its way to becoming a producer of cash) that has a wealthy major shareholder who owns 45% of the Company, and who has considerably more wealth. Would this investor not protect his investment by providing the Company with more cash (if needed) if other financing sources were unavailable at a crucial time as the promise of the business developed.

There are certain situations which would be missed by “screening” for traditional balance sheet metrics, but for which there are extenuating circumstances that when understood may indicate a possible investment opportunity missed by others.


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