One meaning of topsy-turvy per Webster is “in great disorder or confusion.”

My personal view for the apparent confusion that presently drives the market way up one day and way down the next involves several factors:

-where can one put his/her money to gain a return, other than the stock market, with interest rates so low?

-isn’t the stock market overpriced on an earnings basis?

-aren’t dropping oil prices good for the consumer and thus the economy?

-if oil prices stay very low for a prolonged period, what will this do to the energy sector, its capital investment strategy, and thus the economy?

-how will the global economic struggles impact U.S. stocks?

-will the Fed raise interest rates and, if so, when?

Etc, etc.

I’ve often heard across the last couple of years how the balance sheets of corporate America have never been healthier. Yet, how one defines “health” is key. If health is defined as a company having working capital available today with a debt maturity profile showing that no debt is coming due for several years or more, perhaps balance sheets are very healthy, on average. However, if one defines health (as I do) as not only having ample working capital (liquidity), but also having a sufficient amount of total tangible assets over the total financial obligations (total liabilities including all debt) to be considered “solidly solvent,” many companies are currently borderline at best.

A number of oil service companies like drilling companies, for example, are being sorely tested right now. If oil stays down, there will inevitably be casualties in this group. Some of these potential failures may not “appear” to owe the principal part of their debt anytime soon. That is, the maturity dates “stated’ on the debt may be years away. However, the likelihood of operating losses for drillers while oil prices languish means in order to simply keep running the business day to day that cash will be going out the door faster than it’s coming in. As a result, the ability to pay interest on debt may become challenged and debt contract provisions can be violated due to lack of earnings from operations. So, even though the principal is not “technically” due for years, violations of debt covenants can change all that in a heartbeat.

So, there is a false security in believing that a balance sheet that has a lot of cash or near-cash resources today without debt coming due for some time is healthy enough to automatically weather a potential period of economic downturn. While, of course, there are no guarantees for any company out there (in any sector) to survive “anything and everything”  since the future is always an unknown, the companies in the best position to sustain operations during challenging times are the ones that have not only solid cash or near-cash resources to carry on day to day operations, but also have a sufficient amount of tangible assets over total liabilities. My “Choose Stocks Wisely” scorecard tests for quality of this sort.

Earnings (profits) have played such a huge role in our valuation of stocks for years now that the balance sheet has often been slighted, in my view. Yet, it remains the only financial statement specifically intended to give a company’s present financial position. Perhaps, as market participants work to figure out answers to some of the “topsy-turvy” questions at the outset of this post, the balance sheet will become more recognized by the marketplace in its effort to discern real value from illusory value.

Genuine value should always be in vogue.