For stock investors that favor companies with good fundamentals, a "strong" balance sheet is an important consideration for investing in a company's stock. The strength of a company's balance sheet can be evaluated by three broad categories of investment-quality measurements: working capital adequacy[->0], asset performance[->1] and capital structure[->2]. In this article, we'll look at evaluating balance sheet strength based on the composition of a company's capital structure.
A company's capitalization (not to be confused with market capitalization[->3]) describes the composition of a company's permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a company's capital structure is an indication of financial fitness.
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SEE: Profitability Indicators
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Clarifying Capital Structure Related Terminology
The equity part of the debt-equity relationship is the easiest to define. In a company's capital structure, equity consists of a company's common and preferred stock plus retained earnings, which are summed up in the shareholders' equity account on a balance sheet. This invested capital and debt, generally of the long-term variety, comprises a company's capitalization, i.e. a permanent type of funding to support a compan

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[->0] - http://www.investopedia.com/terms/w/workingcapital.asp
[->1] - http://www.investopedia.com/terms/a/assetperformance.asp
[->2] - http://www.investopedia.com/terms/c/capitalstructure.asp
[->3] - http://www.investopedia.com/terms/m/marketcapitalization.asp
[->4] - http://www.investopedia.com/university/ratios/profitability-indicator/ratio4.asp#axzz1z0DOEDp7
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