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Usually, before deciding to invest in a company, I prefer to to look at 2 figures in their balance sheet

  • Current asset
  • Current liabilities

Very often, I assume the company with

Current asset > Current liabilities

are considered as healthy company. I further testify my assumption with a few well known quality companies and several companies in trouble. I realize my assumption seems correct.

I was wondering, whether they are good method? Is there any important figures I should look into, to cross check the healthiness of a company?

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There are many ways to 'check'... But could any of them have predicated the Lehman crash... ? –  BAR Aug 26 at 1:46

3 Answers 3

I have always been a fan of the quick ratio, total debt, and cash on hand. I like to know that the company has options should a market stressor come their way. I then like to compare year over year for each to see how these quantities/ratios are moving.

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The closest thing I use is Equity ratio. What value is considered healthy is different across market/sector/the stage of the company etc., but generally if this is too low it's considered risky.

Other things I look for is PER and PBR. I'll compare it against similar peer companies, and if it's abnormally low/high I'd be careful. I also look at corporate credit ratings and read analyst reports.

Having said that, I believe in efficient market hypothesis and thus believe you are most probably better served by simply investing in indexes which lets you invest in many companies (also called "passive investment"). Choosing individual stocks requires extensive experience & time and people rarely have that. Unless you are doing it for fun, I'd stick to indexes.

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I disagree; current assets are assets that are reasonably expected to be converted into cash within one year in the normal course of business. Similarly, current liabilities. It's not true that current assets > current liabilities in all cases. I do agree that the relationship is not particularly useful, though. –  ChrisInEdmonton Aug 25 at 15:36
1  
@ChrisInEdmonton: oh right, I thought "current" just meant "latest". English isn't my first language.. I'll edit my answer accordingly. –  Enno Shioji Aug 25 at 16:52

Check its past earnings reports. If it's beating out the predictions it should be a very healthy company. That is just one way. There are many.

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