Share-price trends and earnings reports are important for investors to follow, but they don't tell us enough about a company's long-term financial health to gauge whether it's a solid investment. To make that assessment, investors should take a close look at a company's balance sheet.

In this clip, Kristine Harjes and Todd Campbell explain what balance sheets can reveal about companies and their investment potential, how they can be compared in order to pick between two enterprises that distribute the same product, and where to find them online.

A full transcript follows the video.

 

Kristine Harjes: Buckle up, listeners: We are getting into some pretty nitty-gritty financials today. Specifically, we want to talk about the balance sheet. In my mind, you can split drug developers into two categories: those that are a little bit more established, and those that are not as much. So, our conversation today is really going to focus more on some of the more established companies, but that means that a lot of what we're covering today is applicable across all of Big Pharma, and pretty much any company with a good, established portfolio of drugs, that has money coming in, as opposed to some of these tiny biotechs that we talk about where, when we look at them, we really want to focus on things like cash burn. That's a whole different story.

Before we get into any company specifics, what exactly is a balance sheet?

Todd Campbell: First of all, let me start by saying that most investors tend to focus on the sexier numbers -- revenue growth, EPS growth -- and the balance sheet sometimes gets forgotten. What I think is very important, though, when investors are considering healthcare companies, is to consider the balance sheet as a very easy-to-look-at, simple to use tool for figuring out, is the company financially healthy? Because in any given quarter, you can put up solid revenue growth, or solid EPS growth. And that doesn't necessarily mean that the company is going to be able to pay its bills over the long haul.

So, what the balance sheet does is it shows you how much a company has in assets, it shows you how much a company owes, and then it shows you how much equity shareholders have in that company. So, essentially what you have is three different pieces of the puzzle. You have assets. Assets will always equal liabilities plus equity. But the big takeaway here is that assets are things like cash, property-planned equipment, things that can be liquidated. Liabilities are things that people owe, like long-term debt, borrowings, those type of things.

Harjes: Yeah, and the other good thing that's included on the balance sheet is the distinction between short-term and long-term for a lot of these items. So, you can really get a picture of, does this company owe a lot of money in the next year? Or, does it have a lot of long-term liabilities? And same thing with assets as well. Meanwhile, you can find these companies' balance sheets on the SEC's Edgar website, which a quick Google search will get you to. From there, find the 10-K, 10-Q filings, and you can find the balance sheets in them.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.