Wallace G. Rommit was doing some serious channel surfing on the TV one evening. Spending no more than 2 seconds on each channel, he was deep in couch potato mode.

Just as he flipped past the financial channel, he heard the word "Cheezers" voluptuously uttered. Wallace liked cheese, and was seriously considering buying some stock in Cheezers of Wisconsin [Nasdaq: CHZE]. After all, he liked their new Wendsleydale flavor and had visions of it on every dinner table. Now that someone was actually talking about it on channel 437, his adrenaline levels surged.

The Talking Head continued, "Yes, Cheezers does make some excellent food. Just had some with my lunch. But, I think all the viewers out there should take a look a similar company, Cheeseheads, Inc. [Nasdaq: HEAD]. They make an almost identical product, and it costs the company 10% less per ton to make cheddar. I'm recommending a strong buy on Cheeseheads and telling people to beware of Cheezers."

Wallace began to scratch his head in confusion. He really liked Cheezer's cheese, but The Talking Head sounded so convincing. Wallace knew about Cheeseheads and remembered the advertisements he had seen during the last Packers game. He began to contemplate Talking Head's comments and thought that anyone that is able to go on national television and talk about stocks must know what he was doing. Maybe Cheeseheads was the bigger cheese, but Wallace was still confused.

--Ding Dong---

Upon opening the door, Wallace was greeted by a merry-looking fellow in a foolscap. It was none other the Mr. Motley Fool. "Yah, hey dere! I hear you are thinking about buying Cheezers, but are tempted to buy Cheeseheads? Similar companies, similar products, similar stock price... ya know, dere's a way to balance out which company looks healthier. While da Fool does advocate buying stocks of products you use and like, we do like to look at financial numbers too. All dis can be confusing I know, but let's take a look at each company's financial statements and see what we can't dig up. Yah."

Wallace's bewilderment only lasted a second. The Fool was clearly there to help, and anyone who wanted to talk cheese was welcome in Wallace's house.

The Fool whipped out his trusty laptop, logged on to the web, and printed up the appropriate facts and figures in a jiffy. "Hey Wallace, check dese balance sheets out and tell me what you think. Which company has da largest amount of working capital? Which has highest book value per share?"

Cheezers
Cash                    $25,000,000
Current Assets          $45,000,000
Total Assets           $220,000,000

Current Liabilities     $10,000,000
Total Liabilities       $50,000,000

Shares Outstanding       10,000,000

Cheeseheads
Cash                     $55,000,000
Current Assets          $120,000,000   
Total Assets            $350,000,000

Current Liabilities      $90,000,000
Total Liabilities       $200,000,000

Shares Outstanding        30,000,000

Match The Company To The Highest Value.

1) Cheezers : Book Value - Cheezers

2) Cheezers : Book Value - Cheeseheads

3) Cheeseheads : Book Value - Cheezers

4) Cheeseheads : Book Value - Cheeseheads

The Answer is - 1

Just to lay down the facts again:

Cheezers
Cash                    $25,000,000
Current Assets          $45,000,000
Total Assets           $220,000,000

Current Liabilities     $10,000,000
Total Liabilities       $50,000,000

Shares Outstanding       10,000,000


Cheeseheads
Cash                    $55,000,000
Current Assets         $120,000,000   
Total Assets           $350,000,000

Current Liabilities     $90,000,000
Total Liabilities      $200,000,000

Shares Outstanding       30,000,000

"First," the Fool said, "let's calculate the amount of working capital each company has. This is simply calculated by taking the current assets and subtracting the current liabilities. In Cheezer's case, it is $45 million minus $10 million, which means the company has $35 million worth of working capital to buy pastures, cows, and Brent Favre commercials. In Cheeseheads' case, we do the same. Take the $120 million in current assets and subtract $90 million, giving Cheeseheads $30 million worth of working capital. Cheezer's with $35 million has more working capital than Cheeseheads with $30 million."

Wallace commented, "But look, Cheesehead's almost has double the cash and triple the current assets. Doesn't that mean they have more money?"

"Yes," The Fool replied, "but you also have to look at their current liabilities. Cheeseheads has far more bills to pay than Cheezers. Cash and assets alone mean nothing unless you consider what sort of loans and suppliers need to be paid."

"Ok, I understand." Wallace said.

"Now let's take a look at the book value. This is simply done by taking the total assets, subtracting the total liabilities, and dividing by the number of shares outstanding the company has."

Wallace replied, "Sounds easy enough! Let me take a crack at it," and scribbled on a sheet of paper:

$220,000,000 - $50,000,000 = $170,000,000
$170,000,000/10,000,000 = $17

The Fool exclaimed, "That's grand! Now try it with Cheeseheads." Wallace scribbled again:
$350,000,000 - $200,000,000 = $150,000,000
$150,000,000/30,000,000 = $5

"So, as you can see, Cheezers wins again, with a book value of $17, versus Cheeseheads, with a book value of $5. Cheeseheads is a larger company, but has much more debt to pay off on a percentage basis than its competition."

Wallace said, "That clears things right up. Cheezers, my original idea with the better tasting cheese, has a healthier balance sheet than Cheeseheads, that TV guy's stock. Think that tips the balance in Cheezers favor for me. Well then, would you care to share a slice of Swiss before I take my dog for walkies?"

"Absolutely!" The Fool happily replied as he prepared a cracker.

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