There are some S&P/ASX 200 Index (ASX: XJO) shares that have a very secure financial position. A good balance sheet can benefit the company in a number of different ways, which I’ll outline below.

ASX 200 shares create three different statements for each financial reporting period – the profit and loss (P&L), the balance sheet and cash flow.

The balance sheet tells us about the assets, liabilities and shareholder equity in the business. As an example, we can think about the balance sheet items of a household. Assets could include bank accounts, shares and property, while liabilities could include a mortgage and a credit card balance.

Let’s talk about why strong balance sheets are important.

Advantages of a great balance sheet

It’s worthwhile having a good balance sheet through all parts of the economic cycle, and it could be essential during downturns for that sector or even the whole economy. Below are some of the advantages.

Strong emergency fund – It’s a wise idea for households to set aside some cash in an emergency fund for a rainy day. If the main breadwinner loses their job, the household expenses still need to be paid, so having money available can be a lifeline in tough times.

Companies still need to be able to pay for their operations even if revenue were to (temporarily) decline. If ASX 200 shares have a good balance sheet, they can hopefully navigate a market correction or even a recession with no significant long-term issues. Having that cash could even mean the business is able to invest and keep growing during difficult times, making it well-positioned for recovery.

When Bill Gates started Microsoft, he ensured that the company had enough cash to last 12 months with no revenue coming in.

Acquisitions – Having financial strength can enable an ASX 200 share to make useful deals. Acquisitions can happen at any point in the economic cycle, and being able to swallow up a weaker competitor when they’re struggling in a downturn can be a very beneficial move.

Avoid dilutive capital raisings – ASX 200 shares have a few different sources of funding – they can use cash on their own balance sheet, they can use debt (not ideal as that comes with risk and the interest cost) or a capital raising by issuing more shares.

Ideally, businesses will do capital raisings at a good share price. But, if an ASX 200 share has to raise capital at a low share price, it can mean ‘giving away’ a greater portion of business ownership.

Dilutive capital raisings have happened in recent history, with some ASX travel shares having to raise capital at much lower share prices during the COVID-19 crisis.

A good balance sheet should mean a company doesn’t need to raise capital during a crisis.

Which ASX 200 shares have strong balance sheets?

There are plenty of companies with good balance sheets on the ASX. But I think the best ones are companies that have little to no debt and a good amount of cash and are increasing their financial strength over time.

The three below are good examples of ASX companies with strong balance sheets, in my opinion.

Altium Limited (ASX: ALU) – this ASX tech share makes electronic PCB design software. At December 2022, it had US$205 million of cash which had increased from US$195 million at December 2021. The business has no debt and net assets of US$284 million.

Pro Medicus Ltd (ASX: PME) – this ASX healthcare share provides enterprise imaging and radiology software for large medical institutions. At December 2022, it had no debt and $65.5 million of cash, which was up around $8.5 million from December 2021.

JB Hi-Fi Limited (ASX: JBH) – this ASX retail share sells a wide variety of consumer electronics and appliances. It had no debt and $391.2 million of cash at 31 December 2022, up from $125.6 million at 30 June 2022.

The post 3 ASX 200 shares with strong balance sheets appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Altium and Pro Medicus. The Motley Fool Australia has recommended Jb Hi-Fi and Pro Medicus. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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