Understanding terminologies of Balance Sheet
Do you often get lost in the multiple heads of balance sheets?🤯
Find out how to analyze balance sheets in a simple way 🧵⤵️
#StockMarket #Investment
Do you often get lost in the multiple heads of balance sheets?🤯
Find out how to analyze balance sheets in a simple way 🧵⤵️
#StockMarket #Investment
Firstly, let's understand the Balance Sheet
It is a snapshot of the company's financial position, which helps us in assessing company's equities, assets & liabilities for a financial year.
Investors compute their returns based on financial ratios derived frm balance sheets.
It is a snapshot of the company's financial position, which helps us in assessing company's equities, assets & liabilities for a financial year.
Investors compute their returns based on financial ratios derived frm balance sheets.
Important things to note:
• Assets
• Liabilities
• Shareholder’s equity
A balance sheet adheres to the following equation which means that the company pays for its assets either through borrowings or issuing shares.
Assets = Liabilities + Shareholder’s equity
• Assets
• Liabilities
• Shareholder’s equity
A balance sheet adheres to the following equation which means that the company pays for its assets either through borrowings or issuing shares.
Assets = Liabilities + Shareholder’s equity
Assets have 2 categories:
Current Assets which are liquid meaning that they can be converted to cash within a year or less and;
Non-current or long-term assets which are not liquid.
Current Assets which are liquid meaning that they can be converted to cash within a year or less and;
Non-current or long-term assets which are not liquid.
→ Current assets include cash in hand, inventory, accounts receivable, prepaid expenses and investments.
This figure is used to analyze how efficient a company is in meeting its short-term liabilities.
This figure is used to analyze how efficient a company is in meeting its short-term liabilities.
→ Non-current assets include:
1. Tangible assets: Land, property, equipment
2. Intangible assets: Trademark, intellectual property, goodwill
3. Natural resources: Raw materials
These are used to analyze a company’s investing patterns for long-term stability.
1. Tangible assets: Land, property, equipment
2. Intangible assets: Trademark, intellectual property, goodwill
3. Natural resources: Raw materials
These are used to analyze a company’s investing patterns for long-term stability.
Liabilities have 2 categories as well:
Current liabilities refer to the obligations or debts that the company has to pay in the next year and;
Non-current liabilities are long-term debts of the company.
Current liabilities refer to the obligations or debts that the company has to pay in the next year and;
Non-current liabilities are long-term debts of the company.
→ Current liabilities include accounts payable, accrued interest, notes payable, salary, income taxes payable, short-term loans and deferred payments.
Comparing current liabilities with current assets helps to see the company's ability to manage finances in the next year.
Comparing current liabilities with current assets helps to see the company's ability to manage finances in the next year.
→ Non-current liabilities include debentures, long-term debt and lease payments, bonds payable and deferred tax liability.
It can be compared to the company’s cash flows to understand the company’s financial leverage and whether it can meet its debts without default.
It can be compared to the company’s cash flows to understand the company’s financial leverage and whether it can meet its debts without default.
Shareholder’s equity is the money that owners have invested in business. It consists of:
1. Share capital: Money frm shareholders
2. Retained earnings: Company’s profits are nt given out as dividend
It is used to see if there r funds left aftr using assets to pay off debts
1. Share capital: Money frm shareholders
2. Retained earnings: Company’s profits are nt given out as dividend
It is used to see if there r funds left aftr using assets to pay off debts
Importance of analyzing balance sheets:
• To assess financial health of company
• To compare growth rates of previous years
• To compare financial ratios of rivals
• To assess default risks arising out of bankruptcy
• To assess financial health of company
• To compare growth rates of previous years
• To compare financial ratios of rivals
• To assess default risks arising out of bankruptcy
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Also, if u want to learn in-depth financial analysis, do visit Quest's course on financial statement analysis - bit.ly
Also, if u want to learn in-depth financial analysis, do visit Quest's course on financial statement analysis - bit.ly
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