What Is A Balance Sheet?
A balance sheet is a financial statement, that every company reports every quarter or every year to show its assets, liabilities, and shareholders’ equity. A balance sheet helps investors to find out a company’s capital structure and to compute the rates of return.
The balance sheet is being used with other financial statements like the income statement and the cash flow statement to analyze a company’s fundamentals.
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What Does The Balance Sheet Include?
The balance sheet shows you three things about a business or company.
- Shareholders’ Equity
In the balance sheet,
Assets = Liabilities + Shareholders’ Equity
The balance sheet of a particular shows you the numbers of that quarter only and it changes on every period. To find out, what changed the win in the business, you have to check the historical balance sheet of that company.
Analyzing the Assets of A Company
The assets of a company are the money that a company owns. Generally, companies divide their assets into two categories, current assets and non-current assets (fixed assets). The current assets and non-current assets further classified into several categories.
Current assets are the type of assets that have a life span of one year or less and they can be easily converted to cash or equivalent. Current assets are classified into several types.
Cash and Cash Equivalents
Cash and cash equivalents are the most liquid asset for a company, that is cash or assets that can be converted to cash easily. This type of asset appears in the first line of the balance sheet.
Cash equivalent includes short term debt securities (Maturity less the 90 days, bank account, marketable securities, US treasury bills, etc.
Account receivables are the debt owed to the company by its customer or clients for the goods or services, that are delivered, but not been paid yet. When the company collects these amounts, the account receivable decreases on the balance sheet. If they failed to collect the amount, it is considered a bad expanse.
Inventory includes all the produced goods, that are ready for sell, but not sold yet. The inventory serves a buffer between produced goods and manufacturing to full fill orders.
Non-current assets, also know as the fixed assets are assets which can not be liquidated or sold immediately. The non-current assets are classified as several types.
All investments, that can not be liquidated within a period of more than a year are considered as long-term investments.
Property, Plant, and Equipment
All the properties like land, office buildings, plants, and machinery are the most important and necessary things for a company and those things can not be sold immediately. So all these items are considered as non-current assets or fixed assets.
Intangible assets like copyright, goodwill, trademark, patents, and licenses are considered as non-current assets.
Analyzing The Liabilities of A Company
Liabilities of a company is the money the company owes to its lenders. Like assets liabilities of a company are divided into two categories, current liabilities, and long-term liabilities.
Current liabilities are the money a company owes in a short-term period. The current liabilities of a company might include the current portion of long-term debt, bank indebtedness, interest payable, wages payable, customer prepayments, dividends payable and others, earned and unearned premiums, accounts payable.
Long-term liabilities are the money owed by the company but do not need to pay it back on shorter-terms. Long-term liabilities of a company might include Long term debts, interest, and principal on bonds issued by the company, Pension fund liabilities, differed tax liabilities, etc.
Analyzing The Shareholders’ Equity
Shareholders’ equity is the asset or money owed by the company’s owner and it’s shareholders. Shareholders’ equity is considered as the net asset of the company.
Shareholders’ Equity = Total Assets – Liabilities
It is a very important number, as you can see the net worth of the company. To be clear shareholders’ equity is not necessarily the worth of a company on sale. Because business is sold on the basis of earning multiplier, and the value of a company is always greater than the shareholders’ equity and is called book value.
When a company earns a certain amount of money over a period, it decides whether to give the money to its shareholders in the form of dividends or reinvest the money in its business. The reinvested amount is the company’s retained earnings. In some cases, dividend-paying companies have some money left on their investments.
Stocks are of two types, that is common equity stocks and preferential shares. One can buy equity stocks through the stock market. The preferential shares are issued by the company and have a greater claim on the company’s earnings and assets.
Share capital is the amount of money invested by the common investors and it is reflected in the company’s balance sheet.
Analyzing The Balance Sheet
As you can see above the balance sheet of the company is divided into two main areas. The top portion comprises of assets and the bottom comprises of shareholders’ equity and liabilities. As you can see here the assets side equals the shareholders’ equity plus the liabilities. The balance sheet should be organized, like the above example.
Analyzing Balance Sheet With Ratios
Figures in the balance sheet can be used to calculate some important ratios and equations to analyze a company’s balance sheet properly. Using ratios like debt to equity ratio and the working capital investor gets a better idea about a company and know-how stable the company is. The financial ratios provide insights into a company’s operational efficiency.
The Bottom Line
A balance sheet with the profit and loss statement and cash-flow statement, it provides better insight into a business and its operations. The balance sheet is the financial snap-shot of a company at a certain period of time (Generally quarterly and annually). The main purpose of the balance sheet is to let its investors or potential investors know what the company owns and what it owes.