Beginner3 min readFundamental Analysis and Financial Statements · 5/15
How to Read the Balance Sheet
The balance sheet answers a simple question: what does the company own, and how was it paid for? Since every asset must have a source of funding, the two sides always balance.
What you will learn
Understand the equation: assets = liabilities + equity.
Tell current from non-current items on both sides.
Know what equity tells you and what it does not.
The lesson as a short video · 20 seconds · Watch on YouTubeIn this lesson
Everything a company owns was funded in only two ways: money it borrowed or still owes (liabilities), or money shareholders put in or left in the company from its profits (equity). So assets always equal liabilities plus equity.
Assets 1,000
Current 430Cash 80, receivables 150, inventory 200
Non-current 570Plant and equipment
=
Liabilities + equity 1,000
Liabilities 400Payables 150, short loans 100, long loans 150
Current assetsItems expected to turn into cash or be settled within the company's normal operating cycle or within 12 months; if the operating cycle is not clear, 12 months is assumed: cash, money customers still owe, and inventory.
Non-current assetsItems used for longer than that: land, buildings, plants and equipment.
The funding side
Current liabilitiesWhat is expected to be settled within the normal operating cycle or within 12 months: suppliers and short-term loans.
Non-current liabilitiesDebts due beyond that, such as long-term loans.
EquityThe capital shareholders paid in, plus the profits the company kept over the years.
ExampleAl Wadi Foods has assets of 1,000 million and liabilities of 400 million, so equity is 1,000 − 400 = 600 million. With 100 million shares, equity per share is 600 ÷ 100 = 6 pounds. That is the book value per share.
Equity is not the share price
Equity is an accounting figure, mostly based on what the company paid for its assets. The market may value the company well above or below it, depending on its expectations for profit. Book value is a reference point, not a fair price.
Watch outThe balance sheet is a picture of a single day, the last day of the period. The cash balance today may be very different. Compare several balance sheets in a row instead of judging from one picture.