Oct 22, 2014

Just something about Contingent Liabilities: Stock Investment

Contingent Liability is a liability company meet when particular condition is met. It is not a must to spend but situation can arise when company need to honor the liability. Because it is not fixed on time, it is not expressed in balance sheet as permanent column but mentioned as star mark in balance sheet. Investor need to check this fine line as this amount could be huge and if company need to pay this then this can affect company's result.

Contingent liabilities can be legal penalty company may need to pay, contract not meet, product recall (automobile companies do this time to time), and similar.

Contingent liabilities are compared with Sales/Revenue. Like Contingent liabilities is 10 percent of sales.

Contingent liabilities is like a time bomb which can dent company's balance sheet. So, careful and do not ignore it.

To find the reason of contingent liabilities, check Annual Report of the company. It can be probable, reasonably possible or remote. Remote means there is less chance company may need to meet the liability. Probable is high chance that company need to meet the liability. Reasonably possible falls in between.

Stock Price and Contingent Liability

Contingent Liabilities classification