Stock Balance Sheet Review

Stock Balance Sheet Review

Purpose

Read the balance sheet for survivability. Most retail investors ignore the balance sheet until a recession exposes the leverage they didn't price in. Surface leverage and liquidity risks, goodwill bombs from past M&A, working-capital deterioration that signals customer-credit pressure, and off-balance-sheet hooks that compound in stress. Output a structured Findings set with quantitative thresholds.

When To Use

• Orchestrator dispatches balance-sheet review (always-on in Standard / Strict depth).
• User asks "is financially safe", "what's the debt situation", "can survive a recession".

When NOT To Use

• Earnings quality / cash flow → stock-earnings-quality-review
• Business model → stock-business-review
• Capital allocation history → stock-management-review
• Competitive position → stock-industry-review

Mandatory Gates

1) Execution Integrity Gate

Read the balance sheet from the most recent 10-Q (more recent than 10-K). If only 10-K is available, note the date staleness in Execution Status.

2) Industry-Norm Gate

Leverage tolerable for a utility is catastrophic for SaaS. Identify sector before applying thresholds. Default thresholds below are general; flag if your sector materially shifts them.

3) Off-Balance-Sheet Gate

Read the "Commitments and Contingencies" footnote in every review. Operating leases were brought on-balance-sheet by ASC 842 (2019), but contingent liabilities, guarantees, and purchase obligations are still footnote-only.

4) Goodwill-History Gate

A single goodwill impairment is a yellow flag; multiple is a red flag indicating chronic overpayment in M&A. Check 5-year impairment history, not just current year.

5) First-Hand Data Gate (mandatory)

Cite debt, cash, lease, pension, goodwill, AR and contract-liability figures from the manifest's first-hand financials.json (SEC EDGAR XBRL, via scripts/finlib/edgar.py) or directly from the filing — never from a search snippet. Any leverage ratio you state (Net Debt/EBITDA etc.) must use the named-input formulas in scripts/finlib/ratios.py so it survives the orchestrator's 口径 lint gate; in particular EV-based metrics require total_debt and cash_and_sti (a net-cash company has EV below market cap). Tag any second-hand figure as such and lower confidence accordingly.

Workflow

1. Load 10-Q balance sheet and 10-K notes (Commitments, Goodwill, Pension).
2. Run filing-pattern-gated scan.
3. Compute ratios: Net Debt / EBITDA (using TTM EBITDA from financial-history), Current Ratio, Goodwill / Total Assets, DSO, Inventory Days.
4. Compare to industry norms and to the company's 5-year history.
5. Emit Findings.

Filing-Pattern-Gated Execution Protocol

Execution Order

1. Locate balance sheet (10-Q latest), Goodwill note, Commitments note, Long-term debt note.
2. For each checklist item, locate the specific line/note.
3. HIT → compute ratio, compare to threshold, semantic-confirm.
4. MISS → mark NOT FOUND.
5. Report only Findings that breach thresholds OR show adverse trend.
6. Include Filing pre-scan: X/Y items hit, Z confirmed.

Balance Sheet Checklist (9 Items)

Severity Rubric

• High: Survivability-threatening. Net Debt/EBITDA > 4× in cyclical sector; cash runway < 6 months; goodwill > 50% of assets; multiple recent impairments.
• Medium: Adverse but manageable. Leverage rising; DSO trending up; contingent guarantee material but defined.
• Low: Watch-list. Inventory days slightly elevated; pension modestly underfunded.

Evidence Rules

• Compute the ratio yourself; cite the source lines.
• Include the threshold you're comparing against (general or sector-specific).
• Trends: cite at least 3 years of values, not a single snapshot.

Output Format

Findings

[High|Medium|Low] Short Title

• ID: BS-NN
• Citation: balance sheet line / note, with periods
• Evidence: computed ratio + threshold + trend
• Implication: what this means under stress

Suppressed Items

Execution Status

Filings reviewed: 10-Q (Q3 2025), 10-K (FY2024) for footnotes
Filing pre-scan: 9/9 items hit, 2 confirmed as findings
Industry norm applied: <sector>

Summary

One line: N High / M Medium / K Low — most material: <BS-NN short title>.

Machine-Readable Findings Block (mandatory)

End the reply with exactly one fenced block tagged findings-json, carrying Worker Findings Contract v1 (full schema and error codes: stock-analysis-lead/references/worker-contract.md). The orchestrator synthesizes the verdict from this block only — anything stated in the Markdown above but omitted here does not reach the report. Everything above the fence is for the human reader.

{
  "contract_version": "1",
  "worker": "stock-balance-sheet-reviewer",
  "prefix": "BS",
  "status": "OK",
  "depth_mode": "<echo the dispatched depth>",
  "archetype_applied": "<echo the dispatched archetype>",
  "archetype_challenge": null,
  "findings": [
    {
      "id": "BS-NN",
      "severity": "High|Medium|Low",
      "title": "<= 80 chars",
      "citation": {"source": "10-K", "locator": "<item/page/note>", "fiscal_period": "FY2025"},
      "evidence": "direct quote <= 60 words, or a computed figure with its inputs",
      "implication": "one sentence on what this means for the thesis",
      "confidence": "first-hand|second-hand"
    }
  ],
  "positives": [],
  "data_gaps": [],
  "checklist_coverage": {"items_total": 9, "items_checked": 0, "items_not_found": 0, "ids_not_checked": []},
  "mandatory_checks_run": []
}

Contract rules that fail validation if broken:

• status is one of OK / DEGRADED / SKIPPED / REFUSED; any value other than OK requires a status_reason. The gate returns SKIPPED (...) in prose and "status": "SKIPPED" here.
• Every finding ID must start with BS — the prefix is the whole segment before the first hyphen.
• citation is an object, never a bare string; locator and fiscal_period must be non-empty. A finding with no real citation is suppressed, not emitted.
• source: "aggregator" forces confidence: "second-hand" — this is what makes the first-hand data rule checkable rather than aspirational.
• checklist_coverage: items_checked + items_not_found must reach items_total (9), so "the checklist ran to completion" is verifiable.
• archetype_challenge: null when the dispatched archetype fits. When the evidence says it does not, file {"proposed", "reason", "evidence"} instead of silently analyzing against thresholds you believe are wrong — this is the only sanctioned way to disagree with the orchestrator's classification.
• mandatory_checks_run: list the archetype-specific check IDs the dispatch marked REQUIRED. Omitting one that was required fails validation.

Self-check before replying:

python3 <path-to>/stock-analysis-lead/scripts/finlib/worker_contract.py \
  validate --reply <this-reply>.md --expect-worker stock-balance-sheet-reviewer

No-Finding Case

No balance-sheet findings — leverage moderate, liquidity ample, no goodwill concentration.
Notable positives: Net Debt / EBITDA = 0.4×; Cash > Total Debt.

Load References Selectively

• references/balance-sheet-red-flags.md — load when assessing goodwill concentration, off-balance-sheet items, or pension liabilities; contains the sector-norm leverage table, historical examples of goodwill bombs, and the Commitments-and-Contingencies decoding guide.

Review Discipline

Balance sheet failures are slow until they're sudden. A leveraged company looks fine in a bull market and dies in a recession. Be unforgiving on High thresholds; the orchestrator will weight these heavily in the Bear scenario.