Imagine being able to take a business like Apple Inc (NASDAQ: AAPL), one of the leading technology companies in the world, and perform a financial health check in just 60 seconds.
Well guess what: with the Simply Wall St platform, this East possible.
In the first part of this series, we explored how investors like you can begin to navigate the volatility of the COVID-19 market using analyst quality tools.
Despite what you may be thinking, you don’t need to have an MBA or be a professional stock analyst to follow these steps and avoid ending up with the wrong companies.
That said, this East the kind of analysis currently being undertaken by armies of highly paid Wall Street analysts. These analysts could earn $ 150,000 a year or more.
The party ends in the balance sheet
There is a popular saying among Wall Street bankers that says something like this:
“The opportunity is in the income statement, but the risk is in the balance sheet.”
If you agree with that, then right now – as economists and investors grapple with the COVID-19 effects of rising unemployment, falling business models and tightening credit markets – all world must pay attention to the balance sheet.
In a stock market crash and recession, liquidity and short-term assets become essential for all businesses, regardless of size, form or industry. This is because even the biggest and best brands on the planet (like Apple) need cash to pay their bills on time.
Quick overview of Simply Wall St: Apple’s track record
If a company, for example, has more cash than debt (analysts call this a “net cash” position), this is a good start. However, if the same company has enough short-term assets (cash, receivables, etc.) to cover all his responsibilities – it is even better!
You now know that the Simply Wall St platform analyzes 70,000 stocks every day.
When we analyze a company’s balance sheet to test its financial health, we look more than its liabilities. We carry out six types analysis to provide you with a score for each business.
For example, Apple currently meets two of our balance sheet criteria, as you can see below:
Apple’s current assets exceed its and long-term liabilities. This means that the liquid assets on its balance sheet exceed the total value of all the liabilities.
The image above reveals how the Simply Wall St platform at once highlights the main advantages and disadvantages of any company’s balance sheet.
Is all debt bad? Are lower interest rates helpful?
Some companies may manage debt. And falling interest rates mean that interest payments on corporate debt are getting cheaper. These are important considerations.
Many types of professional analysts, from credit rating agencies to purchasing researchers, will test a company’s debt profile by examining a few basic metrics. The most obvious of these “financial stress tests” is whether the company can afford to pay interest periodically. Obviously, one of the last things an investor wants to hear on the evening news is that their business has defaulted on their debt!
The point is, even if you know how to manage the financial statements, finding the right information and analyzing each company in your portfolio can be time consuming.
As we can see in the analysis for Apple above, the Simply Wall St platform looks at its debt and financial health from several angles. Of these, “interest coverage” is a very good measure to follow, as it is a tool used by almost all of Wall St’s rating agencies to assess creditworthiness.
In our business example, Apple, we can see that it earn more interest from her treasury to the bank than what she pays on the debt she has contracted with credit investors.
Few companies are like Apple, because many companies do not have as much money:
Because the Simply Wall St platform automatically tracks your company’s latest debt, equity and cash balances over several years, with a few clicks on our platform, you can:
- See how your business is funded (is it “net cash” or “net debt”?), And
- Build unique information on management’s capital allocation strategy
The graph above clearly shows that Apple started to take on more debt a few years ago, around 2014/2015. At the same time, the company quickly increased its cash balance. As of the date of the last report, Apple’s cash and debt were about equal. Again, we cross-checked its debt profile with interest payments. So you don’t need to encrypt the numbers.
For serious investors who wish to deepen the balance sheet and understand the working capital of the company, Simply Wall St “breaks down” the assets and liabilities of each company to make it even easier for you to get the best information.
What happens if I don’t like what I see on the balance sheet?
Let’s be realistic. Few companies have $ 100 billion in cash like Apple. Many companies are simply not in a very good financial position.
And in this environment, companies with even the slightest signs of a stressed balance sheet could succumb to intense sales pressure if they approach Wall St bankers and credit rating agencies looking for a bailout.
Often times it’s best to eliminate these unhealthy companies early in order to remove them from your watch list or wallet and focus more on the strongest companies. We did this selection process extremely easy. Users of our investor plan can click a button and navigate to get the full list of the healthiest companies in the industry or industry.
We think you will agree that this is where the real hidden power of quality analyst tools like Simply Wall St offers investors.
How to find hidden gems in a stock market crash
the real reason many professional analysts are paid hundreds of thousands of dollars each year for one reason and one reason only: make money.
More than 100 years of market history tell us that the best time to go out and browse the market for hidden opportunities is when the stock market has fallen. Hard.
With each passing day, it looks like the market is launching more and more discounted stocks to add to your watchlist or portfolio. But we can’t buy everything, because some are “cheap for a reason.” We need a way to cut the price action and focus on the valuation.
As we know, one of the best investment strategies available is to find the strongest (ie “healthiest”) companies in the market and wait for stocks to become deeply undervalued. You’ll be happy to know that we’ve created sophisticated tools to help you sort over 70,000 stocks based on value factors and health in just a few clicks!
Finding “deep value” in the stock market is as good as possible for investors.
Simply Wall St
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