How to analyze a Balance Sheet in less than 2 minutes:
The balance sheet is one of the three major financial statements.
It shows a company’s:
▪️Assets: What it owns
▪️Liabilities: What it owes
▪️Shareholders Equity: It's net worth
At a fixed point in time
It shows a company’s:
▪️Assets: What it owns
▪️Liabilities: What it owes
▪️Shareholders Equity: It's net worth
At a fixed point in time
That “at a point in time” part is key!
A balance sheet is a SNAPSHOT of a company’s net worth.
It is measured at the end of a quarter/year.
A balance sheet is a SNAPSHOT of a company’s net worth.
It is measured at the end of a quarter/year.
Management teams have leeway in categorizing their balance sheet.
This means that not all balance sheets look the same.
Here are some of the most commonly used terms and what they mean:
This means that not all balance sheets look the same.
Here are some of the most commonly used terms and what they mean:
The big question I’m trying to answer when analyzing a balance sheet quickly:
Is this balance sheet strong, average, or weak?
Why? Strong balance sheets give companies options.
Weak balance sheets eliminate options.
Is this balance sheet strong, average, or weak?
Why? Strong balance sheets give companies options.
Weak balance sheets eliminate options.
Balance sheet strength is especially important during bad times (like now)
Strong = option to play offense
(acquire rivals, hire talent, pick up market share)
Weak = forced to play defense
(cut costs, layoffs, delay projects)
Strong = option to play offense
(acquire rivals, hire talent, pick up market share)
Weak = forced to play defense
(cut costs, layoffs, delay projects)
What I focus on first:
1⃣Cash & Equivalents: How much?
2⃣Debt: How much? What kind?
3⃣Goodwill: How much?
4⃣Retained Earnings (+ T.S.): Positive?
5⃣Receivables & Inventory: How much?
1⃣Cash & Equivalents: How much?
2⃣Debt: How much? What kind?
3⃣Goodwill: How much?
4⃣Retained Earnings (+ T.S.): Positive?
5⃣Receivables & Inventory: How much?
Best Possible Answers
▪️Cash & Equivalents: Millions / Billions (depends on company size)
▪️Debt: None
▪️Goodwill: None
▪️Retained Earnings (+ T.S.): Positive
▪️Receivables & Inventory: None
▪️Cash & Equivalents: Millions / Billions (depends on company size)
▪️Debt: None
▪️Goodwill: None
▪️Retained Earnings (+ T.S.): Positive
▪️Receivables & Inventory: None
Other areas to quickly glance at:
▪️Working Capital (ideally negative)
▪️Operating Lease Liabilities (ignore)
▪️Deferred Revenue (hopefully has some)
▪️Working Capital (ideally negative)
▪️Operating Lease Liabilities (ignore)
▪️Deferred Revenue (hopefully has some)
It's also helpful to look at a few simple balance sheet ratios:
(These are calculated for you on many free websites)
(These are calculated for you on many free websites)
I’d never make an investment without MUCH more analysis than this.
Accounting (and investing) is FILLED with nuance.
Still, with less than 2 minutes of analysis, you can quickly identify whether a company's balance sheet is strong, average, or troublesome.
Accounting (and investing) is FILLED with nuance.
Still, with less than 2 minutes of analysis, you can quickly identify whether a company's balance sheet is strong, average, or troublesome.
Learning to read financial statements is an incredibly important skill, but accounting is FILLED with nuance.
@Brian_Stoffel_ and I are teaching a live course in January that explains accounting in plain English.
Interested? DM me for a coupon code.
maven.com
@Brian_Stoffel_ and I are teaching a live course in January that explains accounting in plain English.
Interested? DM me for a coupon code.
maven.com
If you enjoyed this thread, the chances are excellent that you'll love this other accounting thread I wrote, too:
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