Second step – starting with analysis

2.   Now let´s move on to balance sheet analysis. We have mentioned that it is important to monitor the trends and ratios (liquidity, solvency, and financial leverage ratios). From this point of view, we will know if a company and its financial system are healthy or unhealthy.

We will start with Paypal. First of all, we need to download the data. We can do it easily from MarketWatch (for free) or Zacks, but we prefer to do it from SeekingAlpha. Then we need to calculate our ratios, which we had mentioned in the previous chapter. Here are the results:

Source: Author’s calculation using SeekingAlpha’sdatabase (*TTM represents trailing twelve months, its end of the period)

We use quarterly TTM data rather than annual data. But if you want to look at things over a long period of time, you can use annual data. At the moment, we use quarterly TTM data. Firstly, we would put into consideration the chart’s outputs to see the development and comment it.

Source: Author’s calculation using SeekingAlpha’s database (*TTM represents trailing twelve months)

We can easily monitor the trend of total assets vs. total liabilities and equity. What do you see here? First of all, we can monitor the trend, which is really positive in both ways-total assets as well as equity. Moreover, we can see a rise in liabilities too, but this does not concern us because equity (on the right side) is growing solidly. If we could dig deeper into Total Assets, the rise is mainly due to the rise in Total Current Assets (which is a highly positive sign) as well as in long-term assets and goodwill (the rise in this item is not highly satisfactory, but does not mind).

In the case of total liabilities, the biggest increase can be seen in current liabilities (mainly in the item “other current liabilities”). 

The total amount of debt is slightly decreasing, and it’s quite positive because Paypal’s balance sheet is deleveraging. However, as we saw in the previous table, the company has a strong balance sheet that can take on much more debt in case of need. Now let’s look at the debt structure. We need to go to 10K filling form from the SEC. Here is the result (Paypal obligations-payments due during the following years).

Source: Form 10-K

Usually, you should be aware of any debts or payments that are coming due in the next time period, mainly in time horizon when yields jump significantly. The reason is that a problematic company could have a problem with refinancing its debt. Monitor the cash balance and ask yourself if the company can generate enough regular cash flow from operations to fund or repay this debt. If not, ask again if the company has enough cash on its accounts to finance that debt. If not, there is a danger of insolvency or dilution, which could harm the shareholders. Avoid such companies, which have a weak balance sheet position or a  total current assets position.


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