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 into 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).
This will be things like:
- Patents
- Goodwill
- Machinery
- Equipment
- 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).
This will be things like:
- Patents
- Goodwill
- Machinery
- Equipment
- Real estate
Assets aren’t always physical.
And sometimes intangible assets are the most valuable (brand).
Short term liabilities
These are debts and bills that are due, or will be due, within 1 year.
For example:
- Taxes payable
- Short term loans
- Accounts payable
- Accrued expenses
- Interest payments on LT debt
Short term liabilities must be paid with current assets.
These are debts and bills that are due, or will be due, within 1 year.
For example:
- Taxes payable
- Short term loans
- Accounts payable
- Accrued expenses
- Interest payments on LT 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 to consider on a balance sheet:
Debt to equity:
Total liabilities / Total equity
Aim for < 2
Quick ratio:
Current assets - inventory - prepaid expenses / current liabilities
Aim for 1+
Current ratio
Current assets / current liabilities
Aim for 1+
Debt to equity:
Total liabilities / Total equity
Aim for < 2
Quick ratio:
Current assets - inventory - prepaid expenses / current liabilities
Aim for 1+
Current ratio
Current assets / current liabilities
Aim for 1+
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.
Thank you for reading!
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