augie, let me introduce you to my Econ Class SBSR 101 titled:
“SKEPTICAL (i.e., highly conservative) BALANCE SHEET READING”
When a company is being priced like it is going out of business, I employ this technique. It is a very fast way to read a balance sheet, and can be used as a first scan technique on any company, whether they are going out of business or not. The technique can be summarized with the following formula:
[(Cash and Short Term Investments) – (Total Liabilities)]/(Total Shares Outstanding) = (Bottom Line Value per Share)
Just be careful to look for the consequences of any preferred shares on the books.
Now notice this technique completely neglects any positive accounting for ‘Receivables’…it basically assumes the worst (i.e., that the company is not going to be getting paid). It also does not include anything for ‘Inventory’ (which rapidly depreciates anyway for high tech companies in particular). It also does not include any assets in the positive side of the ledger for hard assets (Property/Plant/Equip.), or ‘Other Long Term Assets’; these are not trivial to verify and besides, in a bankruptcy, hard assets get heavily discounted anyway. And of course nebulous crap like ‘Intangibles’ and ‘Goodwill’ are completely ignored (rightfully so for conservative accounting practice).
Remember, this is a very conservative but fast way to read a balance sheet, with the odds in your favor of it keeping you out of hot water and away from supposedly ‘screaming buys’ that are actually headed to 0.
However, properly applied, this formula also helps one discern the difference between ‘cheap’ vs. ‘inexpensive’…BIG difference.
Regards,
thecalculator |
