Joys Of Compounding: The Passionate Pursuit of Lifelong Learning

by Gautam Baid

Balance Sheet Analysis Net fixed assets. Look for sharp increases in this figure on the balance sheet. These increases signify that the company has completed a capex program, which could drive higher sales and profits in the future. Capital work in progress. Look for sharp increases in this figure on the balance sheet. These increases signify that the company is currently undertaking a capex program, which may be on the verge of completion. Share capital. Ideally, the share count should be constant over the years, or it should decrease because of buyback. An increase in share capital that is not due to bonus shares represents a dilution of existing shareholders. Keep in mind that stock splits and bonuses affect only the liquidity of a stock, not its intrinsic value. Debt-to-equity ratio. The lower this ratio is, the better. Check for off–balance sheet exposures like underfunded pension liabilities, disputed legal claims, non-cancelable operating leases, and contingent liabilities like corporate guarantees for loans taken by promoter-owned group entities. Test the debt serviceability through interest coverage (earnings before interest and taxes/interest) and FCF. A company may have a low debt-to-equity ratio but still face financial stress if the cash is insufficient to meet the near-term payment obligations.