Investing 101: Balance Sheet - Accounts Payable & Long Term Debt
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
More losses in the stock market are caused by not knowing how to evaluate a company's fundamentals. When it comes to analyzing a company, you need to know what is on their balance sheet. I'll walk you through some of the basics, and give you an example of how this relates to your finances to make things easier. Given that books have been written on how to read a balance sheet, I'll try to keep this simple. In other posts I've already gone over the asset side of the balance sheet, today let's look at the liabilities side. We'll look specifically at accounts payable and long term debt.
You can find the company's balance sheet on many finance web sites like Motley Fool, Yahoo Finance, Google Finance, etc. The balance sheet is usually broken into three parts, assets, liabilities, and stockholders equity. (Keep in mind when you see numbers on a balance sheet they are normally quoted “all numbers in thousands or millions”. This is how $10,300,000 or $10,300 can actually mean $10.3 billion, don't forget to add those 3 or 6 zeros!)
When it comes to liabilities, everyone understands debt. Corporations have debts just like you and I do. They are normally referred to as accounts payable or long term debt. To look at a specific example we'll examine Procter & Gamble's (NYSE: PG) liabilities.
Accounts Payable
Accounts payable is just a fancy way of saying bills that are due. If Procter & Gamble owes someone money, and its due currently it will normally show under accounts payable. Think of this like your normal living expenses in your personal budget. You have to pay the cable bill, telephone bill, electric bill, etc. Those are all examples of accounts payable. Accounts payable should be compared in relation to the assets on the balance sheet. Most companies have a fairly consistent ratio of accounts payable. If the ratio is steadily increasing, it's something to keep your eye on. A constantly increasing percentage of accounts payable, may indicate the company is having trouble keeping up with their bills. In Procter & Gamble's case we see the following:
(all numbers in billions)
|
|
Mar. 2011 |
June 2011 |
Sept. 2011 |
Dec. 2011 |
|
Total Assets |
$136.50 |
$138.30 |
$136.60 |
$134.30 |
|
Accounts Payable |
$16.40 |
$17.30 |
$16.50 |
$15.70 |
|
Accounts Payable % of Total Assets |
12.01% |
12.51% |
12.08% |
11.69% |
As you can see Procter & Gamble operates with 11% – 12.5% of accounts payable. Since it's within that range and not steadily increasing it looks like Procter & Gamble is doing fine.
Long Term Debt
Long term debt is exactly what it sounds like, debt that is not due soon. Just like your mortgage, the debt has to be paid off, but not in the near future. Procter & Gamble shows $19.27 billion in long term debt. Long term debt has been the ruin of many companies so it's definitely something to be aware of. When long term debt increases versus total assets it can be a sign of a problem. Companies that don't make enough to fund their operations often turn to long term debt to try to solve the problem. If the company borrows too much, then the debt payments won't be made and its off to bankruptcy. In Procter & Gamble's case we see their long term debt to total assets was 15.89% a year ago, and today it stands at 14.35%. I start to get nervous anytime long term debt is more than 50% of total assets. The less debt the better in my opinion.
Just for point of comparison, let's look at the long term debt of another company that competes with Procter & Gamble and see how they match up. Kimberly-Clark Corporation (NYSE: KMB) competes with Procter & Gamble specifically when it comes to paper products. Kimberly-Clark shows $5.4 billion in long term debt versus $19.63 in total assets. This gives Kimberly-Clark a long term debt to assets ratio of 27.51%. As you can see Kimberly-Clark carries relatively more debt than Procter & Gamble. Both companies are strong and have no problem meeting their debt payments. However, Procter & Gamble has a little more flexibility because of their lower relative debt load.
Now we've gone over assets and liabilities. In my last post on the subject, we'll cover the stockholders equity portion of the balance sheet. Let me know if you have any comments or questions, in the comments section below.
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