The Penny Stock Balance Sheet
The balance sheet displays how much a company owns and how much it owes to others. With penny stocks, the balance sheet is of paramount importance because it illustrates a company’s ability — or inability — to pay its debts.
Everything on the balance sheet is broken down into the following two groups:
Assets: This includes anything of value that the company owns, such as inventory, factories, machinery, computers, cash, and prepaid expenses. It also includes amounts owed to the company, such as outstanding invoices that have been sent to customers or incoming royalty payments.
Liabilities: Any amount owed by the company to others is a liability. These can include debt, monthly rent, accounts payable, equipment leases, and so on.
Assets and liabilities are further divided based on their timeframe:
Short-term (current): Any amounts owed or owing within the next year are classified as short term:
Short-term assets include accounts payable to the company and monthly sales.
Short-term liabilities may include monthly rental payments due, bills, and interest payments on credit.
Long-term: Any amounts owed or owing, but not for at least one year, are considered long term:
Long-term assets include items such as factories, bonds redeemable in several years, and real estate.
Long-term liabilities include any amounts owing but not due for at least a year, such as mortgages, loans, or future royalty payment obligations.
When a company owns a building and pays monthly mortgage payments, that building is a long-term asset. The total mortgage payments for the coming 12 months are current liabilities, while the remaining amount owed on the mortgage after those payments is a long-term liability.
Balance sheets are divided into the following sections, in order:
Current assets: The balance sheet always starts by displaying the company’s current assets. These are items — such as cash on hand, accounts receivable, inventories, and investments — that hold value in the short term because they can be easily sold or used to fund the company’s operations.
Long-term assets: The next section on the balance sheet is a breakdown of all the assets a company has besides those which were applied to the current assets portion of the report. Examples of long-term assets include company cars, factories, computers, the value of the brand name, and the value of any trademarks.
Total assets: This section combines the current and long-term assets, to reveal the total value of all the company’s assets.
Current liabilities: Current liabilities include all amounts the company owes within the next 12 months. These current liabilities are generally made up of numerous items, mainly because most companies generally have numerous expenses.
Long-term liabilities: Anything the company owes, but not for at least 12 months, is included in the long-term liabilities section of the balance sheet.
Total liabilities: The sum of the current and long-term liabilities indicates the total liabilities, which represents all that the company owes.
When reviewing a penny stock, you want to make sure that its total assets cover its total liabilities, but you also want to verify that its current assets cover its current liabilities.
By reviewing a company’s balance sheet, you can see how much it has or is likely to bring in compared to how much it owes or will be paying out. When a company covers its liabilities with its assets, it’s generally in a healthy position, especially when compared to any company that owes a lot more than it has available.