How to explain critical balances convincingly
When a company’s balance sheet positions don’t look as rosy as they should, good communication is needed to satisfy investors. Companies need to show that they have the situation under control.
Wiesbaden, August 20, 2021. Good communication is particularly evident in a crisis situation. One of the trickiest tasks for board members and IR managers is how to explain complicated and critical balance sheets to investors in a clear, understandable and convincing way. The balance sheet is an important source of information for investors to assess the economic health and resilience of a company
Clarify negative balance sheet positions
But what happens when retained earnings are increasingly reduced, equity capitalization melts away, or the level of debt has already reached the pain threshold of what is customary in the market? What if, in uncertain times such as the Corona years 2020 and 2021, significant financial liabilities fall due and follow-up financing is required? Or what if significant parts of the balance sheet consist of intangible assets and investors see a risk of significant impairment?
Nothing can be done about the balance sheet structure in retrospect – but a company should recognize the potential concerns of the capital market in advance and think carefully about how and when it communicates the critical issues. After all, the capital market accepts clearly and stringently moderated special situations, whereas poor or euphemistic communication is punished by investors.
What does the balance sheet mean in the big picture?
It is always important to keep the “big picture” in mind, i.e. to explain the balance sheet in the overall context of the operating business and the corporate strategy. Why, for example, is it acceptable for a company to take on high levels of debt in the current situation? Why might it even make sense to take this step? What concrete measures is the management taking to remain capable of acting in line with the corporate strategy in the future?
Forward-looking, regular and clear communication is the key to success here. This ensures that the capital market is not taken by surprise and signals to investors that management is in control. This is how you create trust – especially in difficult times.
Do you need support to communicate skillfully and transparently with your investors, even in times of crisis? Contact the specialist for professional IR work
Claudius Krause: Senior Consultant
Claudius Krause holds a degree in business law with a focus on international business law and banking and capital markets law. He worked for a German commercial law firm in Germany and China. He has also managed numerous investor relations and corporate communications projects.