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Important Things to Know About a Stock's Balance Sheet

KO Debt to Equity Ratio (Quarterly) Chart
KO Debt to Equity Ratio (Quarterly) Chart

KO Debt to Equity Ratio (Quarterly) data by YCharts

Therefore, investors need to consider a company's size and its business model before determining if a high debt-to-equity level is worrisome. It can also be helpful to compare debt-to-equity ratios against peers to determine if levels are too high.

Regardless, the current ratio and the debt-to-equity ratio are valuable calculations that offer greater insight into the financial health of a company and whether it should be owned in portfolios.

Trending balance sheet items

Viewing trends in specific items on a balance sheet over time can also help shape an investor's opinion of a company as an investment. Charting cash and long-term debt, for example, can show you if a company is borrowing to finance its debt and if investments in M&A and products or services are paying off.

Let's take a closer look at how trending these measures may influence an investment decision by considering Celgene again. Celgene's total long-term debt is skyrocketing, and its cash and equivalents stockpile has more than quadrupled since 2012. By looking at these two trends together, we can see that the long-term debt growth isn't nearly as worrisome to investors as it would be if Celgene wasn't also stockpiling cash:

CELG Cash and Equivalents (Quarterly) data by YCharts

Alternatively, let's look at how trending these items may prompt concern. Valeant Pharmaceuticals ' M&A-heavy approach to growth has caused its debt to soar without a corresponding increase (yet) in cash. Since Valeant Pharmaceuticals' business is expanding rapidly via acquisition, it's not certain how its spending will translate into cash on its balance sheet in the future, but these trends suggest that investors ought to spend a fair amount of time considering how much value Valeant Pharmaceuticals will be able to reap from its deal-making.

VRX Cash and Equivalents (Quarterly) data by YCharts

Tying it together

Investors shouldn't rely solely on a balance sheet to make their investment decision, but a balance sheet can highlight potential weaknesses in a business that investors need to investigate further. For that reason, balance sheet analysis is an important part of finding winning investments.

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The article Important Things to Know About a Stock's Balance Sheet originally appeared on Fool.com.

Todd Campbell owns shares of Celgene. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Celgene and Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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