The maximum mark for each ratio is 5. The lowest ratio for each ratio is 1. To get the most objective results for every company, we need to stamp every single ratio and then sum them. We can calculate the financial health as a percentage of the given points vs. max points. This single analysis gave us a very curious insight. Now we can evaluate the company’s financial health and its potential consequences.
We tried to choose companies that are well known among the investors, so there are no reasons for more introduction here. However, we all know their core business or mainly hear about it, but what we do not know is their balance sheet, profitability, and cash flow side. Now let’s move to the balance sheet rating.
First of all, we can see the result, which was given by subjective measure, but you can easily set boundaries if you want. For example, if the company has a current ratio of 0-0.25, the value is 0, when 0.26-0.5, the value is 1. For 0.51-0.75, the value is 2. For 0.76-1.0, the value is 3. For 1.01–1.25, the value is 4, and for > 1.25, the value is 5, etc. You get the point here, and just repeat it for every single ratio. (with different values). Try to be the most objective as you can.
In summary, we can see AT&T has a terrible balance sheet, mainly in terms of liquidity ratio, which is very important. Yes, you can still invest in the company, but I would rather avoid it due to its very weak balance sheet. In the event of a slowdown in revenue, it would be hard for the company to meet its obligations. According to our rating system, AT&T’s financial health is 38%, which is extremely poor, mainly due to the company’s weak financial and liquidity position. The company is significantly leveraged, which is dangerous for us. However, it does not mean AT&T stock can not rise; it merely implies that its balance sheet is dangerous, and we would just avoid this company. With broken balance sheet, there is a significant probability of further dividend cut, reducing of the repurchasing programmes, or high need for further financing.
Alibaba, on the other hand, has a fantastic balance sheet in every way. Its financial health is at 89 percent, and based on these figures, that is the company you should invest in. The issue is that this is a Chinese company, and reports cannot be fully trusted. The SEC (US regulator) requires that Chinese companies’ reports be audited, and its statement can be precise or not. But we believe that a company with such great products and success wouldn’t mislead on its financial reports. Smaller Chinese businesses may face a greater risk. We are confident that the numbers are correct and that the company’s balance sheet is in excellent condition.
When we look at Paypal’s rating, we can see that it is slightly worse. However, at 73 percent, the financial health is still excellent and investable. Keep in mind that our rating is calculated conservatively, and 73 percent, or 7.3/10, is a almost excellent score. In conclusion, the best companies here, according to the balance sheet analysis, are Alibaba and Paypal, both of which are worth investing in (further development depends on profitability and valuation). We won’t analyze AT&T in the next few steps because we’ve ruled it out and it doesn’t meet our balance sheet criteria.