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Whether you're walking a tightrope or scribbling in your checkbook, balance is a good thing. And, one of the best ways to evaluate a company is to glance at its balance sheet to see what it owns with what it owes.
The balance sheet is a paragon of simplicity and is made up of three components: assets (the stuff it owns), liabilities (the money it owes), and shareholders' equity (the company's value to its shareholders).
Assets take two forms: short-term (or current) assets and long-term assets. Under short-term, there¿s good ol' hard cash. Then, there¿s something called "cash equivalents," which are assets like short-term bonds that can be sold so quickly, they might as well be cash. There you factor in inventory, which (if you're a reasonably competent business owner) you can sell to customers in return for--you guessed it--cash. (The raw materials a company owns to make that inventory also falls under this category.)
Long-term assets are things that are harder to convert into cash. (Think real estate and equipment.) Long-term assets depreciate, meaning they lose some value over time. Also under the long-term category are what's called intangible assets: things like patents and brands, that are important, but hard to quantify. Accountants earn their stripes figuring out the real overall value of these assets.
Once you know your assets, it's time for liabilities. As with assets, liabilities are separated into short-term or current, and long-term. Current liabilities are what a company owes in that year: Things like payments to employees or accounts payable to suppliers. Long-term liabilities are debts paid over several years.
Shareholders' equity is determined by subtracting the liabilities from the assets. That number represents the value of the company after all its bills are paid.
Obviously, investors should pay close attention to balance sheets. Spikes in the amount of debt carried, or a reduction in shareholders' equity, are usually red flags.
Home / Markets / Economy
Wednesday, June 25, 2008
FOMC Leaves Key Interest Rate Unchanged at 2.0%
FOXBusiness
The Federal Open Market Committee left interest rates alone Wednesday, choosing not to lower rates further to help jumpstart a slowing economy or raise them to ward off inflation.
The decision to keep the federal funds rate -- the rate banks charge each other -- at 2% was widely expected on Wall Street.
“I think every trader on this floor and every person on this planet thinks there will be no change,” Alan Valdes of Hilliard Lyons told the FOX Business Network prior to the Fed’s announcement.
It was the first Fed meeting since August that ended without a change to interest rates.
Soaring energy and food prices had led to speculation that the Fed might start reversing course on a strategy that has seen interest rates cut seven times since last summer.
But market watchers predicted that, despite concerns for growing inflation, the timing isn’t yet right for a rate increase.
“Given the tenuous state of the financial sector, I think (raising rates) would be a mistake,” said Paul Nolte, director of investments at Hinsdale Associates. “I don’t think the Fed by raising interest rates will be able to curb food and energy prices. It’s only in (those) two areas. Inflation is not as pervasive as it was in the 70s, when you had prices rise across the board.”
“What’s forcing inflation is not something that we’re going to solve by raising rates,” added Mark Pado, U.S. market strategist at Cantor Fitzgerald.
The Fed is expected to confront rising prices at meetings later in the year, however.
A gallon of gas costs $4 a gallon or more across most of the U.S., and agricultural commodities such as corn and soybeans are also sitting at record prices..
Meanwhile, unemployment is rising and many experts believe the economy is either in or on the brink of a recession.
All of this gloom was reflected by a Conference Board report released Tuesday that showed its gauge of consumer sentiment dropped in June to the lowest reading in 16 years.
The Fed, through its primary tool of raising or lowering interest rates, can only tackle one problem at a time – either spur the economy by lowering rates and promoting borrowing and spending, or raise rates to fight inflation.
From September through April, the Fed aggressively cut interest rates in an effort to keep a severe credit crunch and prolonged housing slump from pushing the country into a deep recession.
However, after a series of sizable rate cuts as the credit crisis was roiling global financial markets at the beginning of this year, the Fed at its last meeting in April reduced rates by a more modest quarter-point to 2%. The funds rate had been at 5.25% before the central bank began cutting rates on Sept. 18.
While the decision to do nothing was widely anticipated, financial markets are closely watching exactly how Fed Chairman Ben Bernanke and his colleagues explain their views about economic conditions.
In a speech on June 9, Bernanke strongly hinted that the Fed would take a hardline against inflation at some future point.
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