How to read the balance sheet？

Regulators (such as the Securities and Exchange Commission) require public companies to submit certain financial updates to the public on a quarterly basis.。The balance sheet is one of the things that are required to be disclosed, and you can usually find them in the quarterly earnings report published on the company's investor relations webpage。Private companies, on the other hand, do not have to publicly disclose their finances, and they tend to share their balance sheets only with their boards and some of their largest shareholders.。

The balance sheet equation consists of three parts, with assets equal to liabilities and shareholders' equity。

Looking at this report, you will see that the value of assets is the same as total liabilities plus total shareholders' equity。On the balance sheet, assets and liabilities are usually ranked according to their ease of conversion into cash, which, in financial terms, is the degree of "liquidity."。Assets are usually ranked in order of most liquid to least liquid, while liabilities tend to be ranked in order of short-term debt to long-term debt。

What tools can be used to analyze the balance sheet？

The balance sheet is another place where investor tools with more ratios can be used very conveniently。

One example is the debt-to-equity ratio: this is calculated by dividing the company's total liabilities by shareholders' equity, and can help investors better understand how the company's capital structure favors debt financing or equity financing。

Other financial analysis ratios derive information directly from the balance sheet and fall into two main categories.

Activity ratios: Activity ratios tend to focus on the current account to show how the company generates revenue from cash and resources, including areas such as inventory, accounts payable and accounts receivable。

Financial strength ratios: These ratios reflect the company's ability to meet its obligations, such as repaying creditors, and the financial sources that fund the company's operations。An example of a financial strength ratio is the working capital ratio, which is a measure of short-term financial health and liquidity, i.e. the ease with which a company can meet its short-term financial obligations with short-term cash.。

What is an asset？

An asset is something of value owned by a company, either direct financial value or the value of running a business。There are two main types of assets:

Current assets: These assets can be converted into cash within one year。Some examples of current assets include cash and cash equivalents, amounts owed to the company over the next 12 months, and inventory。

Non-current assets: Non-current assets are more difficult to convert to cash, including things that take more than a year to become cash, such as plant, property and equipment, and any other payments due to the company after more than a year。Non-current assets can also be intangible, meaning their value is independent of tangible property。Tangible assets such as equipment undergo so-called depreciation, while intangible assets are usually amortized。Depreciation is the decline in value, which, in more professional terms, represents the monetary cost of an asset over its useful life.。

What is a liability？

Liabilities are liabilities that a company owes to external parties, either long-term or short-term.。

Current liabilities: This refers to arrears that must be paid within one year, which may include liabilities such as short-term borrowings or accounts payable.。
Long-term liabilities: These are debt and non-debt obligations that mature at least one year from the balance sheet date。

What is shareholders' equity？

In the balance sheet equation, shareholders' equity equals the difference between total assets and total liabilities。Another way to consider shareholders' equity is that if the shareholder's net worth is linked only to the particular company under consideration, then it represents the shareholder's net worth。

Shareholders' equity is not equal to the real-time value of shareholders' shares based on share price.。This is usually a more conservative calculation based on the book value of the company's assets and liabilities。market value is different, it is based on investors "perceptions of value, while volatility is more。Shareholders' equity is calculated as what the value of shareholders' shares would be if the company collapsed - what is left when the company pays all its debts and sells all its assets, which is shareholders' equity。

What is the use of a balance sheet?？

The balance sheet is one of a trilogy of financial statements that can provide key insights into how a company supports its expenses and the efficiency of its operations. This is a snapshot that can be taken at any point in time。

Two other key financial statements are the income statement and the cash flow statement, which highlight other elements of a company's financial position. The balance sheet can help investors quickly understand a company's financial position and is also useful to creditors and lenders, which can help lenders (such as banks) determine whether they should extend credit to a business or whether they should extend existing credit to the company.。

What a balance sheet can't do？

While the balance sheet is very helpful, it also has its considerations。Here are some of them:

Historical transactions: Although balance sheets are a snapshot of a company, they still reflect only financial events that have occurred, such as assets acquired in the past。Therefore, they do not by themselves predict。Still, they can be used by analysts and investors as useful information to help shed light on a company's potential trajectory.。

Limited asset inclusion: assets are a party to the balance sheet equation。However, it is important to note that only assets acquired by the company in the transaction are included in the asset calculation。Goodwill is reported on the balance sheet, some of which are intangible assets, which may include the value of the company's brand or its know-how - the disadvantage is that the value of these intangible assets cannot be accurately quantified。

Asset appreciation: For long-term assets acquired through a transaction, such as land or real estate, the value of the long-term asset used on the balance sheet is the transaction price less accumulated depreciation。How the item is reflected as an expense in the financial period over the time span in which the asset is used。

For example, the depreciation expense of a $10,000 smoothie machine that is sustainable for 10 years may cost the company $1,000 per year for 10 years, even though the market value of the property or land may increase over time。As a result, the market value of a company's land and buildings may be significantly different from the market value reflected in the balance sheet equation。This is considered when the asset is sold and is referred to as the "gain or loss on sale of the asset"。