What is: The Balance Sheet?
- What Is: Passive Investing
- What Is: Dollar Cost Averaging?
- What Is: Bottom-Up Investing
- What Is: Top-Down Investing
- What Is: Value Investing
- What Is: Growth Investing
- What Is: Income Investing
- What Is: GARP Investing
- What Is: The Rule of 72
- What Is: A Falling Knife
- What Is: Cyclical Stocks
- What Is: The Dividend Yield
- What Is: The Price-to-Earnings Ratio (P/E)
- What Is: The Cash Flow Statement
- What Is: A Share Split
- What Is: A Share Buyback
- What Is: Discounted Cash Flow
- What is: An Exchange-Traded Fund (ETF)?
- What is: A Hedge Fund?
- What is: The Balance Sheet?
- What Is: The Profit and Loss Statement?
- What is: A Limit Order?
- What is: A Two-Bagger
The balance sheet is one of four financial statements. It shows the financial position of a company as of the date issued. It lists a company’s assets (cash, inventory, etc.), its liabilities (debt, accounts payable, etc.), and shareholders’ equity. Unlike the other financial statements, it is only meant to reflect a single point in time, not the aggregate over a period of time. The balance sheet can be considered the core of the financial statements. All other statements either feed into or are derived from the balance sheet.
- The income statement shows how the company’s assets were used to generate revenue and income.
- The statement of cash flows shows how the cash balance changed over time and accounts for changes in various assets and liabilities.
- The statement of shareholders’ equity shows how the equity portion of the balance sheet changed since the last one.
Many analysts come to the balance sheet first to gauge the health of the company. It is also often listed first on the quarterly or annual reports.
The basic equation of accounting is reflected in the balance sheet. Assets = Liabilities + equity If you look at a balance sheet, you’ll note that the total assets always equals the total of liabilities and equity. This reflects what the company owns (assets) and how what it owns came about, through the funding given it by liabilities (borrowings) and equity.
The balance sheet is either laid out in a side-to-side manner, with the assets on the left and liabilities and equity on the right, or in a vertical manner, with assets listed first, then equity and liabilities. Assets are listed in order of liquidity, starting with current assets (those which can be converted into cash within one full reporting cycle, usually one year) and starting those with cash, the most liquid of assets. As one moves down through the list, one comes across less liquid assets, such as:
- Accounts receivable which must be collected from customers before they are cash; and
- inventory which must be converted into goods and / or sold before they become cash.
Long-lived assets include plant, property, and equipment (or PP&E, usually net of accumulated depreciation), goodwill, long-term investments, etc. Liabilities are listed in order of when they come due, starting with those due within an accounting period (usually one year), such as accounts payable and the portion of long term debt due within that period. Long term liabilities include borrowings from banks and bonds issued. Finally, shareholder equity rounds out the list. Things to remember
- Read the footnotes, as many, if not all, of the line items in the balance sheet are expanded upon with more detail there.
- Not all debt that a company may be liable for will show up on the balance sheet.
- Different industries have different balance sheets, financial institutions being the most prominent example. Banks, for instance, show the deposits from their customers as a liability (which it is, the bank owes that money to the customers) and loans issued as assets. Both of these are debt obligations running in opposite directions, and belong in different portions of the balance sheet.
- “Book value” is a synonym for equity and is the “net worth” of the company (what it has left after all liabilities are paid from all assets — go back to the equation above and solve for equity). However, if there is a lot of goodwill as part of the assets, well, you can’t spend goodwill, so it’s an “intangible” asset. Tangible book value removes goodwill and other intangible assets (such as intellectual property like patents) from the assets before subtracting liabilities and is a stricter (more conservative) look at the net worth of the company.