How to Read and Interpret Balance Sheet

Investors look at balance sheet to evaluate what the company owns and owes before make a decision on stock investment or stock pick.

A company's balance sheet is a snapshot of it's financial condition on a given day, usually at the end of its fiscal year or end of quarter, unlike income statement and cash flow statement which applies over certain period of time. The balance sheet tell investors on what assets the company owns, what liabilities the company owes, and the value of the business to the company owner or common stock holders. In balance sheet, total Assets must always equal the sum of liabilities and Stockholder's equity. This lead to the integrity of balance sheet as shown below:

Total Asset = Total Liability + Shareholder's Equity

The balance sheet has two parts: assets on the left-hand side or at the top and liabilities on the right-hand side or at the bottom as shown in the following picture and table listed below.

 

 

Balance Sheet

Balance sheet tell investor what are the company assets  and what are the company Liabilities.

The assets session of the balance sheet listed the most liquid, or "current" such as cash first to the lease liquid (plant and equipment) at the bottom. The liabilities session of the balance sheet lists liabilities in order of their immediacy (how soon the debts must be paid).
The balance sheet is an important tool for analyzing the financial health of a company. Using only a firm's balance sheet, investors can compare current assets and current liabilities to evaluate the degree to which a company can meet short-term payment obligations; please refer to financial ratio analysis for details.

 

Current Assets

Current assets are liquid assets normally would be able to converted to cash within one year.

Cash is the most liquid current asset. Other than case, checks, draft and bank accounts without restrictions also considered as cash due to the ease of conversion into currency.

Cash equivalents are highly liquid assets such as money market funds, U.S. Government securities etc....

Accounts receivable is the money customers owe to the company due to the credit purchase instead of cash purchase. Normally this is one of the significant component of the balance sheet.

Inventory is the material used to produce the finish good during the manufacturing process before they are sold. There are three type of inventory namely raw materials, works-in-progress, and finished goods.

 

Long-Term Assets

Fixed assets refer to tangible assets such as building, plants, property, equipment with a useful life greater than one year.

Depreciation is a process of distributing the purchase price of a fixed asset over certain period of it useful life and appears in balance sheet to deduction from the original fixed assets valude.

Intangible assets (= Goodwill on Consolidation + Expenditure Carried Forward + Mining Exploration Expenditure Trademarks) Patents, copyrights, franchises are intangible and non-physical assets where it value is very difficult to estimate. Sometime intangible assets can consist of a major asset in some company especially those research and development based companies.

Current Liabilities

Current liabilities are those obligation that a company need to pay off within a year. Dividends, Taxes, Accounts payable, interest and rental are part of the current liabilities. Normally current liabilities are paid using current assets.

Long-term Liabilities or Debt

Long-term liabilities are those obligation with pay off period more than a year such as a loans financing by a company. The installment need to paid off during the particular year is considered as current liability.

Shareholders' equity or Book value

Shareholder's equity is the net worth of a company, in the other words, it is the remaining amount of value after all obligations have been paid off. Shareholder's equity normally consist of the amount of invested capital by the owners plus the net income generates and reinvested (also known as Retained Earnings) in the company.

Working Capital (=Current Assets - Current Liabilities)

This formula is very similar to the current ratio. The only difference is that it gives you a dollar amount rather than a ratio. It too is calculated to determine a firm's ability to pay its short-term obligations. Working Capital can be viewed as somewhat of a security blanket. The greater the amount of Working Capital, the more security an investor can have that they will be able to meet their financial obligations.

Total Assets = Current Assets + Long Term Assets 

GAAP Stand for Generally Accepted Accounting Principles.

FACB Stand for the Financial Standards Accounting Board.