It’s been said that in business, the score is kept in dollars and financial statements are the scorecards. For investors seeking the best value stocks -- those trading at a discount to their intrinsic value -- these scorecards can expose potentially underappreciated elements, if you know where to look.

The three big scorecards are the balance sheet (a snapshot of assets and liabilities), the income statement (covering revenues, costs, and expenses), and the cash-flow statement (similar to a checkbook, documenting cash transactions). It’s our observation that Wall Street analysts often favor just one scorecard, the income statement, which rarely tells the whole story. The balance sheet, however, has many revealing stories to tell.

In our view, the income statement is the health of a company, but the balance sheet is the wealth of a company. The balance sheet shows if the company has the resources to weather tough times, when earnings are depressed. We see value (pun intended) in scrutinizing assets and liabilities to determine a company’s true worth. And we think three components of the balance sheet -- cash and cash equivalents, real estate, and long-term debt -- deserve particular attention.

There’s nothing like cash

As you learned when you received your first weekly allowance, there’s nothing like cold hard cash. Cash and cash equivalents on a balance sheet include actual cash as well as highly liquid, short-term investments that can be converted into cash. But since that money represents assets waiting to be put to work, we deduct the cash from the balance sheet. What remains is what we’re really paying for the business.

Consider the story of athletic footwear manufacturer K-Swiss (market capitalization: $650 million). Its balance sheet lists approximately $280 million in cash. At the time of this writing, the stock was trading at about $19 per share. When you take into account the nearly $8 per share in cash (more than 40% of its current share price), you’re paying just $10 or $11 per share for this business, as we see it. So why is K-Swiss trading at only $19?

As Barron’s notes, K-Swiss has been slow to realize "it must run with the times or be left behind. Its all-white tennis shoe, a classic since 1966 and its best-selling product, is being outdone by snazzier, more modern brands." U.S. sales have declined in recent years, but we think its fundamentals may improve going forward.

In analyzing the company’s cash situation, we ask ourselves, "Where has the cash been and where is it going?" Say a company has $200 million in cash on its balance sheet, down from $400 million a few years ago. Why? Is the company investing in new equipment or acquiring a smaller competitor (which, in our judgment, represents good spending that could ultimately pay off)? Or is the cash disappearing for no good reason? In contrast, if the company added $100 million in cash this year because it sold a business, that could be a sign of smart streamlining.

Real estate, typically found under property, plant, and equipment on a balance sheet, also warrants scrutiny, in our view. Does the company own parcels of land that it isn’t using? If it’s a retail company, does it own its stores? Often real estate’s true worth is undervalued on a balance sheet due to accounting rules requiring property to be recorded at its purchase price, not its current market value. So if a handbag retailer’s balance sheet shows 100 stores purchased for $100 million five years ago, the stores could be worth considerably more now.

One company with a compelling real estate story is Bob Evans Farms (market capitalization: $937 million). The company has three major businesses: a namesake chain of family restaurants, a smaller chain of restaurants called Mimi’s Café, and a food processing and retail business under the brand names Bob Evans and Owens Country Sausage.

In 2006, Bob Evans stock traded at approximately $27. At that time, the company listed net real-estate assets on its balance sheet of $970 million. The company owned 500 restaurants, 115 Mimi’s Café franchises, and seven sausage plants and one warehouse. We estimated the value of those properties at close to $37 per share -- $10 higher than the company’s share price at the time.And the company continues to perform well. According to the most recent financial report, Bob Evans restaurants’ January same-store sales -- locations open for at least one year -- increased 1.8% over the same month a year ago.

Just like evaluating the cash on a balance sheet, real estate assets should be analyzed over time. You don’t have to look much past the current housing slump to see that real estate doesn’t always appreciate in value, but in general -- to paraphrase the Rolling Stones’ 1960s hit -- time is on your side. Real estate prices historically have appreciated, so we think it makes sense to seek companies that have held their real estate for some time, so as to exploit potentially bigger gaps between purchase price and current market value.

Like a prospective spouse, a company with a lot of debt isn’t quite as attractive as a company with no debt. All things being equal, a company with low debt on its balance sheet should sell at a higher price/earnings multiple than a company that’s highly leveraged. In our judgment, the prudent value investor should carefully examine a company’s long-term debt,includingliabilities likemortgages, business loans, and pension obligations.

For example, golf-equipment manufacturer Callaway Golf (market capitalization: $1.1 billion) has no long-term debt and $31 million in cash -- a potentially attractive story indeed, in our view. We believe the company may be poised to gain market favor as it carries out turnaround strategies for its four major golf brands: Callaway Golf, Odyssey, Top-Flite, and Ben Hogan. Since 2005 the company, led by a new chief executive, has launched an accelerating number of promising products; in fact Callaway plans to introduce 30 new products this year, by far the greatest array of new products in any year in the company’s history.

With a clean balance sheet, no significant debt, and a deep lineup of new products, Callaway can continue to accumulate cash while striving to increase its revenue and earnings. And even with fears of a looming recession, which could take its toll on recreational sports like golf, The Wall Street Journal noted the golf industry "is reasonably healthy and surprisingly stable. Golf's economic growth overall was 4.1% between 2000 and 2005."

Companies don’t have to be debt free like Callaway to offer attractive value. Consider the amount of debt -- how long would it take the company to pay the proverbial piper, should the need arise? If a business had $100 million in free cash flow per year and its balance sheet reflected $30 billion in long-term debt, it might take the company 30 years to repay that debt. Compare that to a company with $100 million in cash flow and only $300 million in debt; debt of such relatively modest dimensions could be paid off in just three years. As we see it, companies that can become debt free in five years or less make appealing candidates for investment.

When looking at the company’s debt trends over several years, we take special note if debt has been decreasing and cash levels have been rising -- the sign of an improving balance sheet. Alas, if the opposite is occurring, much like a consumer who’s in over his head in credit-card debt, a company may find itself overwhelmed by interest payments or even facing bankruptcy.

In conclusion, we believe the often disregarded balance sheet holds many clues to understanding a company’s true worth. Cash and cash equivalents; property, plant, and equipment; and long-term debt -- these are key items to look for on a balance sheet to find attractive valuation stories. In our judgment, by digging deeper and looking in places that others don’t, we can gain more insight into a company’s return potential. We find that we do enjoy stories with likely happy endings, courtesy of the balance sheet.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change.  They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities.  Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios.  Earnings growth may not result in an increase in share price.  Past performance is no guarantee of future results.

Turner Investment Partners is an investment-management firm founded in 1990 and based in Berwyn, Pennsylvania. As of December 31, 2007, we managed more than $29 billion in stocks in separately managed accounts and mutual funds for institutions and individuals.

As of January 31, 2008, Turner held in client accounts 284,710 shares of Bob Evans Farms and 845,856 shares of Callaway Golf. Turner held no shares of K-Swiss.