Accounting Ratios

Speculative Balance Sheet


We highlight companies that use their balance sheets to speculate in risky non-core assets. While this might enhance overall returns in the short term, it almost inevitably blows up in the longer term. For example, in the run up to the Asian financial crisis, companies in Southeast Asia would take out US dollar loans, which cost around 5% per annum, and place the proceeds on deposit with finance companies, often yielding 10%. Unfortunately, when currencies devalued against the US dollar, companies lost money on both sides of the balance sheet. Forex losses wiped out shareholders’ equity while finance companies became insolvent and companies could not withdraw their deposits. For more on companies with speculative balance sheet, please read our report: SPECULATIVE BALANCE SHEETS: Borrowing to Bet (5 Nov 2015).

As such, we highlight companies which have investment securities on their balance sheet and where returns on cash and cash equivalents are unusually high.