Analysis of Asset Allocation

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Fundamental Analysis: Limitations of the balance sheet
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The first reason why you should carefully look at the balance sheet is the delay. When the company releases his balance sheet, it's already old news and the structure could have changed drastically.

Even if the companies have to follow the general accounting guidelines and are controlled for that, the balance sheet is anything else that the position during the last day of the quarter (or the year) and some companies do some 'cleanings' of their balance sheet to make them look as good as possible.

As the companies have to follow the accounting guidelines and because the balance sheet is anything else but historical records, it's possible that some of the assets are under or over estimated. These estimations are linked to the valuation method used by the companies.

Due to the above, when you open a balance sheet always look at the auditor's report and at the notes.

But the picture is not as black as it appears above. Still some good indicators can be found in the balance sheet.


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