Balancing Act

For the past several years, cash on the balance sheet has seemed like a liability; a sign that management had no clear vision for growth. Shares of highly-rated companies have underperformed those with low credit ratings by an average of seven percentage points a year over the past four years.

Now, with the collapse of the sub-prime debt market and the end of the easy-money era on Wall Street, healthy balance sheets are coming back in style. In August, top-rate companies were up 2.3% while low-rated companies lost 1.8%.

As credit markets tighten, strong companies will be able to boost market share by taking advantage of their strained competitors. And now that interest rates have come down somewhat, investors are likely to be better off with companies with low debt-to-equity ratios, for their industry, and substantial free cash flow.

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