How Does a Balance Sheet Affect Bonds?

by Wilhelm Schnotz, studioD

Sometimes to raise capital for growth, a company elects to forgo traditional bank-financed loans or issuances of stock, and issues corporate bonds. These bonds work similarly to government bonds, and usually make an interest payment twice a year until they reach maturity, at which time the bond holder redeems the bond for face value, essentially cashing out his investment. While bonds are sometimes seen as a more stable investment than stocks, they're not immune to the financials of the company issuing them, and balance sheet information can influence the demand for the bond on a secondary market.

Balance Sheet Basics

A balance sheet documents a company's overall financial situation at any given point, and provides investors with information on the company's health. A balance sheet lists current assets -- cash holdings, accounts and notes receivable -- as well as assets that will mature in the future, or take longer to liquidate if needed -- real estate holdings, business and office equipment, vehicles and any other items that may be sold to raise money at a future date. Liabilities, such as debts that must be paid in the next year, long-term debt -- bond debt, stock equity and owners' share of the company -- also appear on a balance sheet.

Balance Sheets and Bonds

Because bond traders want to be reasonably certain that the company that issued each bond is solvent enough to make scheduled interest payments and ultimately return their investment when the bond matures, bond traders use balance sheets as a better indicator of a company's viability than earning sheets, which are often favored by investors in stock, according to Stanford University. Balance sheets that show a strong company -- those with large amounts of cash or short-term assets in relation to liabilities tend to make bond traders more comfortable with purchasing bonds.

Balance Sheet Analysis

As with any time investors analyze balance sheets, comparing trends over several sheets is just as important as the single-moment snapshot described on a single sheet. Basic trends, such as the increase or decrease in a company's cash holdings or short-term debt, identify trends that may indicate potential strengths or weaknesses. Other measures, such as equity -- a company's value after it meets all its outstanding debt, and leverage ratio -- the ratio of debt to equity, can be used to determine a company's financial situation, and in turn, the wisdom of purchasing its bonds.

Bonds on the Balance Sheet

Depending upon their format and detail level, some balance sheets may not list bond debt individually. Most of the time, bond debt is listed under long-term liabilities, as in most instances bonds mature at a date more than a year in the future. Additionally, if bonds are issued at above face value, known as on premium, the balance sheet should list those sales as well.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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