The Backing of a Resilient Balance Sheet

Many a time, investors pay little heed to balance sheets. Probably, it is because they aren't as exciting as income statements, which depict earnings growth. Nevertheless, when it comes to analysing the liquidity and financial health of a company, the importance of analysing a balance sheet cannot be overlooked. After all, a resilient balance sheet has the potential to navigate a company through cyclicity and unpredictable events like demonetisation or the recent liquidity crisis. We have identified four such companies with spectacular balance sheets that could take any storm in their stride without making a dent in their operations. Our Observations At the core of the resilient balance sheets of these four companies was the fact that they had incurred zero net debt (total debt less cash) for the past five years. It signified that these companies had used internal sources to fund their capex requirements (if any), thereby generating positive free cash flows. Also, they maintained a negative cash conversion cycle, which again indicated their strong bargaining power. This would imply they are receiving cash upfront and paying their suppliers later. Contingent liabilities are restricted to a maximum of four per cent of their net worth. There were no cases of changes in their accounting policies, with all of them having reputed auditors. Further, they were able