Are Corporate Balance Sheets In Good Shape?
There have been large changes in the way in which corporate balance sheets and profit and loss accounts are complied. Whereas 20 or 30 years ago, profits or losses generally reflected the difference between the original book cost of an item and the proceeds from its sale, today asset prices are designed to represent their current value and changes in these values are reflected in profits. The implications of these changes do not seem to me to have been adequately appreciated, with the result that claims that “corporate balance sheets are in good shape” are probably wrong and, as they are widely promulgated, this is leading to serious misconceptions. The current financial turmoil has so far been largely restricted to the housing and financial markets but, if corporate balance sheets are in much worse shape than is generally recognised, the risks that financial turmoil will spread to the non-financial corporate sector is much greater than generally appreciated. It has been well remarked
