Hello again friends. Thank you, as always, for your support toward my writing efforts. Thank you for reading my blog posts!

Are we in a recession? Are we going to see inflation brought under control very soon? If so, will it be soon enough to enable a soft landing for the economy, and then followed by a swift recovery? When one has money invested in the stock market, questions like the ones just posed can test the emotions. We don’t like uncertainty but that’s the nature of the stock market.

Stocks have been tanking most recently on reignited concerns of inflation being persistent in the face of the Fed’s efforts to quell rising prices by its interest rate increases. Here are two facts about stocks: they don’t have feelings; and their momentary prices don’t legitimize our feelings about the true value of our investment(s).

You’ve heard me time and again talk about the importance of analyzing the net assets on the balance sheet to determine whether sufficient liquidity and stable solvency are present. Simply stated, the balance sheet is the bedrock underlying a stock investment.

Can an investment withstand an economic downturn? Does it have the wherewithal set aside and in liquid enough form to hang in there if a downturn persists longer than expected? While the stock market mostly disregards the balance sheet and observes EPS quarter by quarter when the economy is moving forward, disregarding the balance sheet during recession is purely dangerous. It’s unwise in the good times but as long as the money is flowing in, a balance sheet in poor standing may be able to continue standing.

The current economic climate brings it all back to the balance sheet, in my view. Growth isn’t the current theme. Stability is the theme. Earnings are great but they only aid in stability if they have been preserved in the past well enough to assure longevity. Even where significant earnings are regularly paid out as dividends, retaining enough of the earnings to the balance sheet for the “what if” possibilities is good financial management. Good financial management is not about managing earnings, but managing the balance sheet. Earnings don’t produce assets. Assets produce earnings. Earnings can replenish assets but a solid asset base must be maintained to give an investor reason to maintain confidence amid economic challenges. The stock price can get thrown all over the place, especially among smaller companies, but what is the reality underlying true equity value? Again, only the balance sheet can answer the bedrock questions.

From time to time, my post will revisit the centrality of the balance sheet to appropriate risk analysis. Today is such a time given the clouds continuing to gather in the macro economy. It is another occasion to refer to my book, “Choose Stocks Wisely,” as a source of how to read and assess a balance sheet relative to stock investing.

See you next time.

Paul