Balance Sheet - Liabilities Side

Balance Sheet - Liabilities Side

Balance Sheet - Liabilities side:

The signs to detect are:

(1)CAPITAL EMPLOYED

Ascertain the figure for the total capital employed by adding to the total 'share capital and reserves' the figures for 'loan capital' and 'deferred liabilities'. The resultant figure will give an indication of the size of the company and whether its operations are on a small or large scale.

(2)TOTAL RESERVES

Find the figure for the combined capital and revenue reserves, and compare it with that of the issued share capital. Should this figure for the combined reserves be higher than that of the issued share capital, certain possibilities may be considered:

(i)If these reserves are well backed by cash and/or short-term investments on the assets side, this may indicate possible substantial expansion projects or the acquisition of a subsidiary.

(ii)Whether these reserves have this type of backing on the assets side or not, the high total for the reserves is an indication of a possible 'scrip' issue (capitalisation Of reserves).

The size of the excess of the figure for the total reserves over that of the issued share capital will determine the size of a possible 'scrip' issue. Again, the higher the excess of the figure for the reserves, the more the likelihood of a recurrence of 'scrip' issues in the future.

(3)GEARING

Ascertain the gearing of the company, which influences the proportion of the profits available for the ordinary shareholders (equity earnings) and hence the ordinary dividend.

(4)BANK OVERDRAFT

Observe the size of the bank overdraft or loan, which should be in keeping with profits and general growth. Where there is a large overdraft the reason for it should be sought from the chairman's statement. Unless it is for an expansion opportunity, normally followed by a 'rights' issue, a large overdraft or loan can be an adverse sign. Heavy borrowing coupled with rapid expansion merits your critical appraisal.

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