9 Companies With Ironclad Balance Sheets

Companies still struggle against an array of economic headwinds: limited availability of credit, continued deleveraging, and high unemployment, just for starters. Now more than ever, investors must keep an eye on their businesses' financial strength, as reflected by their balance sheets. 

Companies you invest in right now -- particularly small ones -- must have strong cash positions, low or no debt, and/or ensured access to credit. While you're looking for companies that are or will soon begin creating profits, you should also make sure your picks have preserved their capital and better positioned themselves financially for stronger economic growth ahead. 

The good news? Companies have saved up cash and paid down debt as a result of the recession, and in some cases are in the strongest position they've ever been in.

Testing financial strength
There are several ways to test balance sheet strength. A balance sheet tells you how much cash a company has, and whether that cash position has increased since the end of last year.

You can also measure a company's health by calculating its current ratio (current assets divided by current liabilities), which measures its ability to pay off its short-term obligations. Look for a ratio of 1 or more here.

Next, study the amount of debt the company carries on its books. The long-term debt-to-equity ratio makes a great place to start. A ratio of 1 would mean that the company's creditors finance $1 for every $1 of equity it receives from stockholders. In this environment, the lower the ratio, the better, as refinancing can be painfully expensive and can increase default rates.

With these guidelines in mind, I sought to uncover companies with strong balance sheets via The Motley Fool's CAPS screening tool. I searched for companies with:

  • Current ratios of 1 or greater.
  • Long-term debt-to-equity ratios of 1 or less.
  • Sterling five-star CAPS ratings, the maximum.
  • Market caps of $250 million or greater.       

Here are some companies I like today:

Company

LT Debt-to-Equity Ratio

Market Cap
(in Billions)

Current Ratio

ABB

0.13

$46.0

1.7

Diana Shipping (NYSE: DSX  )

0.31

$1.1

10

Endo Pharmaceuticals (Nasdaq: ENDP  )

0.04

$2.8

2.9

Fushi Copperweld (Nasdaq: FSIN  )

0.00

$0.3

10

Hasbro (NYSE: HAS  )

0.83

$6.0

3.2

Petroleo Brasileiro (NYSE: PBR  )

0.51

$148.6

1.2

Schlumberger (NYSE: SLB  )

0.21

$71.3

1.9

Teva Pharmaceutical (Nasdaq: TEVA  )

0.21

$42.4

1.5

Unilever

0.63

$80.2

1.0

Data from Motley Fool CAPS.

Balance sheet strength is a critical factor when researching companies -- but it's not the only metric worth watching. Investors must remain mindful of the industry in which the company operates, and that industry's growth potential (or lack thereof). Does the company lead within its industry? If not, does it have a product or service that is gaining traction in the market, to help increase its market share? These are just some of the questions you'll need to ask.

Start finding the strongest companies for your portfolio at Motley Fool CAPS today! Let the collective wisdom of our 165,000-member investment community help you make better investing decisions.

Related Foolishness:

Fool contributor Jennifer Schonberger owns shares of Fushi Copperweld, but does not own shares of any of the other companies mentioned in this article. You can follow her on Twitter. Hasbro is a Motley Fool Stock Advisor selection. ABB and Unilever are Global Gains picks. Petroleo Brasileiro and Unilever are Income Investor recommendations. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 30, 2010, at 3:22 PM, Pushkinator wrote:

    I have not looked at all of these companies, but it hurts the strength of this article to include Unilever as having a rock solid balance sheet. I think Unilever has the potential to be a good investment and I do not expect it to default on its obligations because of its good cash flow. However, Unilever's current liabilities exceed its current assets, which is not a good balance sheet.

  • Report this Comment On August 02, 2010, at 8:55 PM, sumbawa wrote:

    (Strange article, maybe this is one of those auto-generated ones.)

    For an "ironclad" balance sheet how about companies with _zero_ debt? I did a CAPs screen for that (and the other criteria above) and found many companies such as CY, DWA, FDS, MR etc.

    The above looks like a screen was run and then Fool newsletter recommendations were picked from the results. Hasbro's 83% D/E just doesn't seem as ironclad as 0%.

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