When analysing a Company the balance sheet gives an insight into the assets and liabilities of the enterprise and how these have changed over time.
The main concern for an investor is that a Company becomes insolvent – put simply this means that the total liabilities exceed assets and at this point a company will be bankrupt as it has run out of funds and the investors lose their money.
The difference between a Company and a Country is that the same rules do not apply to insolvency. The UK, US, Japan and numerous European Countries have budget deficits of eye watering proportions, they would be insolvent as companies but continue to function and be deemed credit worthy for additional borrowing because the above countries (except the Euro contingent) own a get out of jail free card, a printing press.
A Country with its own printing press can create new money effectively to whatever amount it chooses so it cannot default on its debts, although it can all but destroy the value of its currency.
The situation many countries find themselves in is that their expenditures far exceed their annual incomes, year on year. This imbalance adds to the debt ratio which is becoming dangerously high and unmanageable.
The question going forward is what to do.
- Lie and deny – Greece
- Reduce expenditure – UK
- Engage in political standoff – tax more or cut costs – US
- Do nothing – Japan
The message the markets delivered in 2011 is that ultimately even for countries “The Balance Sheet Matters”.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.