Invest Like Peter Leeds - Step 1

To Invest Like Peter Leeds This is the First Step

Cartoon Man Climbing Ladder Up Coins
Coin Stack with Man Climbing Ladder. Hong Li

There are many penny stock companies which are on the edge of financial oblivion, and most of these end up seeing their share prices slide lower, sometimes all the way to zero.  On the other hand, the businesses which have their fiscal house in order tend to do very well... sometimes VERY, VERY well.  These are the types of penny stocks we uncover at the Peter Leeds service.

The good news is that it is simple to check if a publicly traded company can meet its obligations, and has their debt loads and operating expenses under control.

 Besides being simple, it can be done in a matter of minutes.

Basically, what you want to look into is their balance sheet.  This is a financial statement which displays how much as company OWNS compared to what they OWE.  For publicly traded stocks, this information is freely available through all the best online financial websites.

For example, go to Yahoo! Finance, and enter the ticker of the company in which you are interested. Then, scroll down to "balance sheet" near the bottom.  

There are other financial portals, and they each have their own ways to navigate to the balance sheet, but no matter which website you use, the numbers on the financial statement will be the same.

You will then see several asset items (what the company owns), and plenty of liability items (what the company owes).  Typically the displayed information will be for the most recent annual reports, but it will be better for you as an investor, especially if you are looking into penny stocks, to choose the quarterly balance sheet.

 

By looking at the quarterly balance sheets, you will get a snapshot of how the company is doing asset-wise for the most recent 3 month period, which may provide more recent data than the latest annual 12 month period report will.

Other financial statements, such as the income statement, are cumulative - meaning that their results are based on and build from the numbers from previous periods.

 On the other hand, the balance sheet is more like a recent snapshot of their financial assets and liabilities, so it is better to be looking at the most recent 3 month period than the previous year's period.  You want the latest "snapshot" of their situation.

To give you an idea, here is a link to the quarterly balance sheet for IBM, using MarketWatch.

Keep in mind that with penny stocks you may not be able to find the financial statements for those companies which trade over the counter, such as Pink Sheet and OTCQX shares.  This should be warning enough to avoid such penny stocks, and there is a reason why I always warn about penny stocks trading on the shady markets.  Why would anyone invest in any business which won't, or doesn't have to, tell you their financial position?

Stick to penny stocks trading on the NASDAQ-owned Bulletin Board market, where they regularly and publicly report their financial position.  Then you can easily take a quick glimpse at their balance sheet to make sure they are in good shape.

Once you get to the penny stock's most recent quarterly balance sheet, you should look into four specific numbers:

Current Assets:  These are items like cash, stock market investments, and accounts receivable, which will potentially be used (or at least be usable) within the current year.

Long Term (or Total) Assets:  This is the value of everything the company owns, including items like real estate, factories, plants and equipment, etc...

Current Liabilities:  These items are amounts owing which need to be paid off within the next year, such as accounts payable, interest on loans, severance costs, and rent.

Long Term Liabilities:  These items are owed, but not necessarily to be paid within the next 12 months.  For example, mortgages and long term loans.

The trick to see if a penny stock company can survive for the next few years, and is financially viable, is to compare some of these numbers.

You want to see current assets which are larger than current liabilities.  This means the business will be solvent (able to pay what it owes) for the next year.

You then want long term assets to outweigh long term liabilities.  The greater the ratio of assets to liabilities, the better.

With any company, especially with penny stocks, you should avoid the businesses with greater (or equivalent) liabilities compared to assets.  By moving past these financially suspect companies, and focusing on the financially solid ones, you are dramatically increasing your odds of finding the winners.