Making an accurate valuation for a stock can be overwhelming at times – there are just so many variables to get your head around and a multitude of different valuation methods that can be used.
From price-to-earnings ratios, dividend yields, price to book ratios, technical analysis to trends. The list goes on and on.
One variable that some investors can easily overlook is the strength of a company's balance sheet. It is often forgotten about when times are good, but if things turn south, it is one of the first measures that analysts look at to determine if a company is in good financial health.
Personally, there are three things I focus on when looking at a balance sheet – debt to equity levels, assets to liabilities (especially tangible assets) and the amount of cash or liquid assets the company is holding.
Although the strength of the balance sheet might not dictate the absolute movements of the share price, it is still a valuable measure of a company's financial health and can help to identify a company that has the capacity for further expansion and/or acquisitions.
With these points in mind, here are three stocks with rock-solid balance sheets that will provide a strong platform for future growth:
1. Flight Centre Travel Group Ltd (ASX: FLT) – Flight Centre's share price may have experienced some turbulence over the past 18 months, but its balance sheet has grown in strength during this time. As of June 30 2015, it increased its cash levels to $564.7 million and in addition to this it has debt of just $32.8 million. This bounty of free cash will allow Flight Centre to aggressively pursue growth opportunities through acquisitions, while still maintaining an attractive dividend yield for shareholders. Although the share price has bounced 25% over the last six weeks, the current valuation still provides long term investors with an attractive value proposition.
2. Ainsworth Game Technology Limited (ASX: AGI) – Ainsworth has a debt to equity ratio of just 3.4% and carries more than $41 million of cash on its balance sheet. Interestingly, the company is also carrying more than $5 worth of assets for every $1 in liabilities. The strength of Ainsworth's balance sheet will ensure it will be able to invest in the development and innovation of new gaming products to drive earnings growth in the future. The company is expecting an improved performance in FY16 as a result of new product approvals and the shares appear attractively priced, trading at 13x times FY15 earnings.
3. ResMed Inc. (CHESS) (ASX: RMD) – According to ResMed's FY15 consolidated balance sheet (denominated in US dollars), it currently holds more than US$717 million in cash. In addition to this, ResMed has a debt to equity ratio of just 19% and carries more than $3.50 worth of assets for every dollar of liabilities. The strength of its balance sheet is reinforced even further when these figures are converted for Australian investors following the significant depreciation of the AUD over the past 12 months. The soundness of ResMed's balance sheet will ensure it can pursue research and development activities for new products as well as providing a continuing stream of growing dividends for shareholders.
