How to analyze a balance sheet: (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:
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.
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:
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.
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).
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.
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.
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.
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
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.
@WOLF_Financial @SaveToNotion
