The Balance Sheet: What are Your Shares Getting You?

Financial statements can be overwhelming if you have never worked with them before. They are one of the most confusing parts of analyzing a business. However, they aren’t as confusing as they first appear. A couple weeks ago Brett did a post about breaking down the income statement. Today I’m going to take a look at the fundamentals of a balance sheet.

What is a Balance Sheet

A balance sheet is a look at the stock variables in a company. A stock variable is something that isn’t given in units per time. For example, imagine you are filling up a bathtub. The flow of water into the tub is a flow variable. The tub is filling at a rate of 2L/min. Meanwhile, the volume of water in the tub at a given time is a stock variable. At any time there is a specific amount of water in the tub. The balance sheet looks at a company’s stock info for a specific day once a year.A good analogy is that a stock measure like a balance sheet is like a picture of the company at a certain point in time.

What is on a Balance Sheet

A balance sheet breaks down all the assets, liabilities and shareholders’ equity. First of all, let’s provide some definitions for what those actually mean. An asset is something that the company owns or is owed that they can expect an economic benefit in the future from. Assets are things like the machinery the company holds, the property it owns, and the cash it has on hand. A liability is a debt or something owed to be paid in the future. This is mostly different forms of debt. Shareholders’ equity is any earnings that aren’t paid out as a dividend, and the value of the original sale price of stocks (share capital).

What to Look For on a Balance Sheet

There’s only a few things to look for on the balance sheet. First, compare the total assets and the total liabilities. You total assets divided by debt, also known as your debt equity ratio, should be equal to or less than one. Next, you want to look at is current assets and current liabilities. All the word current means is that they will be dealt with within the next year. Lots of current debt can let you know if the company has a lot of short term debt or if it is tied down for the longer haul.

Finally, you want to look at is shareholders’ equity. This lets you know what each share is entitled too if the company were to go bankrupt. The reason the sheet is called a balance sheet because the total assets should equal the liabilities plus shareholders’ equity.

By looking at the balance sheet we can see how much actual property, inventory, and capital the company holds as opposed to just looking at the company’s income and earnings. While it is probably not as important a piece of the puzzle as the income statement, it provides the investor with valuable information about what they are entitled to if the company were to go under. Also, it lets you see how leveraged a company is and therefore how risky an investment it likely is.

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