How to analyze a balance sheet:
(without a background in finance or accounting)
(without a background in finance or accounting)
A balance sheet is 1 of 3 company financial statements.
It shows you a company’s:
- Assets
- Liabilities
- Net worth
Today I’ll show you how to analyze it:
It shows you a company’s:
- Assets
- Liabilities
- Net worth
Today I’ll show you how to analyze it:
Here’s how to calculate a balance sheet:
Assets = liabilities + shareholder’s equity
Assets are used to operate the business.
Liabilities and shareholder equity fund the assets that allow the business to operate.
Assets = liabilities + shareholder’s equity
Assets are used to operate the business.
Liabilities and shareholder equity fund the assets that allow the business to operate.
Balance sheets are split in 2 sections:
1. Assets
2. Liabilities
There are both short term assets and long term assets.
And short term liabilities and long term liabilities.
Let’s break those down:
1. Assets
2. Liabilities
There are both short term assets and long term assets.
And short term liabilities and long term liabilities.
Let’s break those down:
Short term assets
These are your most liquid assets (<1 year).
This will be things like:
- Cash
- Cash equivalents (treasuries)
- Inventory ((un)finished products)
- Accounts receivable (what customers owe)
These will vary based on the type of business.
These are your most liquid assets (<1 year).
This will be things like:
- Cash
- Cash equivalents (treasuries)
- Inventory ((un)finished products)
- Accounts receivable (what customers owe)
These will vary based on the type of business.
Long term assets
These are assets that can’t be immediately turned into cash (>1 year)
These are things like:
- Patents
- Goodwill
- Machinery
- Equipment
- Copyrights
- Real estate
Assets aren’t always physical.
And sometimes intangible assets are the most valuable (brand).
These are assets that can’t be immediately turned into cash (>1 year)
These are things like:
- Patents
- Goodwill
- Machinery
- Equipment
- Copyrights
- Real estate
Assets aren’t always physical.
And sometimes intangible assets are the most valuable (brand).
Short term liabilities
These are debts/bills that are due or will be due within 1 year.
These are things like:
- Taxes payable
- Short term loans
- Accounts payable
- Accrued expenses
- Interest payments on debt
Short term liabilities must be paid with current assets.
These are debts/bills that are due or will be due within 1 year.
These are things like:
- Taxes payable
- Short term loans
- Accounts payable
- Accrued expenses
- Interest payments on debt
Short term liabilities must be paid with current assets.
Long term liabilities
These are debts and financial obligations owed in at least 1 year.
This will look like:
- Deferred taxes
- Corporate bonds
- Lease payments
- Equipment loans
- Deferred compensation
Long term liabilities can be paid with a variety of business activities.
These are debts and financial obligations owed in at least 1 year.
This will look like:
- Deferred taxes
- Corporate bonds
- Lease payments
- Equipment loans
- Deferred compensation
Long term liabilities can be paid with a variety of business activities.
Shareholder equity.
This is the total dollar amount that shareholders would receive if a company is liquidated.
It includes:
- Treasury stock
- Common stock
- Preferred stock
- Retained earnings
This is a company’s total net worth.
This is the total dollar amount that shareholders would receive if a company is liquidated.
It includes:
- Treasury stock
- Common stock
- Preferred stock
- Retained earnings
This is a company’s total net worth.
Important ratios on a balance sheet:
Debt to equity:
Total liabilities / Total equity
Aim for less than 2
Quick ratio:
Current assets - inventory - prepaid expenses / current liabilities
Aim for 1 or higher
Current ratio
Current assets / current liabilities
Aim for 1 or higher
Debt to equity:
Total liabilities / Total equity
Aim for less than 2
Quick ratio:
Current assets - inventory - prepaid expenses / current liabilities
Aim for 1 or higher
Current ratio
Current assets / current liabilities
Aim for 1 or higher
A balance sheet is a glimpse at how strong a company is financially.
It shows you what a company owns, and what it owes.
This is a key part of analyzing a company’s financials before deciding to invest in it.
It shows you what a company owns, and what it owes.
This is a key part of analyzing a company’s financials before deciding to invest in it.
Thanks for reading!
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If you learned something from this thread, please:
1.RT the first tweet so others can learn too
2. Follow me @WOLF_Financial
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