Financial safety in the context of investing generally refers to items listed in a company’s balance sheet. The balance sheet, also known as the statement of financial position, shows what the company owns (assets) and what it owes (liabilities), as well as the company’s net worth. The minimum for a company to pass is to have its assets more than its liabilities, or in other words, a positive net worth.
Being successful at investing can be attributed to luck in the short term, but discipline usually prevails in the long term. To be disciplined, an investor should attempt to understand the business both qualitatively and quantitatively. Qualitatively, at minimum, one should be able to comprehend the basic demand and supply mechanics along with the industry jargon of a business. Quantitatively, it is rather more straightforward, as there are key aspects of a company that a diligent investor should look at.
This article will focus on the financial safety aspect of a company. It will also be forward-looking, as opposed to studying historical examples of companies that were undervalued from a financial safety standpoint. The goal is to identify companies with good financial health and establish boundaries for what constitutes both acceptable and exceptional financial safety when filtering and examining companies quantitatively. Additionally, only Singapore-listed companies will be studied, benefiting domestic investors who prioritise financial safety as a key factor in selecting stocks.
