UK: ASSETS OF A BALANCE SHEET. - Don't tear it up yet - it can still have its uses.

Last Updated: 31 Aug 2010

Don't tear it up yet - it can still have its uses.

Companies looking to borrow money used typically to reach for their balance sheet and start working out gearing ratios on the back of an envelope. But as investors, banks and the companies themselves focus increasingly on cash flow, those scribbled figures to see whether a project is financeable are much more likely to be calculating the interest cover. If, as some claim - and many lenders found out to their cost in the last recession - a company's assets can only be worth what they can produce, the balance sheet adds little to understanding a company. Says Peter Baring in the last annual report before Nick Leeson broke the bank: 'It would be naive to suppose that greater disclosure of balance sheet data will necessarily give a better understanding of the group.' Others give different reasons for the declining use of the balance sheet. Nick Knight, research head of securities house Nomura, complains: 'Accounting standards change too frequently. So balance sheet comparisons are tricky.' Trevor Llewellyn, finance director of Caradon, the Everest and Twyfords building business, sees another problem. 'If accurate, balance sheets can be useful. But a company like ours must be valued on intangibles like our brand names.' Clive Watson, finance director of Regent Inns, the fast-growing independent pub chain, says: 'Our business is about cash flow. How much money will promising sites, when converted, deliver? Assets are worth what they earn.' Don't tear up the balance sheet just yet however. Watson continues. 'Recession could return. Any profit will then be hard to make. We would then buy sites on the cheap, or turn them into cash. Assets, properly valued, would be crucial. They are also crucial for a new business. When Regent started we had nothing to show the bank manager but a few pubs and a business plan.' Michael Hughes, head of research at Barclays de Zoete Wedd, strikes a similar chord: 'Balance sheets are less important than a few years ago because companies used recession and the subsequent recovery to cut costs and repay debts. They are now full of money to spend on plant and bids. But if recession returns, corporate balance sheets will come to the fore. Gearing could then be the prime yardstick.' And balance sheets can tell of more than the company's asset value. As Nigel Davies of Panmure Gordon points out: 'Business can get tough so suddenly. Never be content to watch sales and profits in isolation. Turn to the balance sheet and see whether stocks are piling up. Then look at borrowings. If stocks are piling up, the company may have to unload at a loss to avoid trouble.' Former auditor and Price Waterhouse partner Ian Adam, now finance director of Christian Salvesen, the Scottish distribution and specialist hire group, concludes: 'Most balance sheets are much more out of date than profit and loss accounts because fixed assets were valued long ago. But balance sheets are not moribund. Businessmen and investors should keep an eye on working capital, the surplus of current assets over liabilities, to see that finances are not over-stretched.' Those keen to see the ever-lengthening list of items required in Reports and Accounts reduced are unlikely to see the balance sheet dropped for a long time to come.

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