How to Read Corporate Balance Sheets

by Minority Fortune

walmartbalancesheetUnderstanding your investments is vital if you plan to call yourself a savvy investor. One of the most key components in investment research is checking out a company’s balance sheet. It’s not as daunting as you think. Balance sheets can give you insight on the company’s performance and fiscal responsibility.

Balance sheets are only one part of a company’s financial statement. They’re usually combined with income and cash flow statements to give you the whole picture of a company’s standing. However, our focus today will be on balance sheets. Once you’ve mastered the balance sheets, you’ll be well on your way.

So, what are balance sheets? We went to Investopedia to educate ourselves further. They’re statements that indicate a company’s net worth, assets, and liabilities. They are divided into two parts, assets and liabilities, that should balance each other out. (Assets = Liabilities + Shareholder’s Equity) Shareholder’s equity represents a source for the business funding. This equity represents debt that the company has to repay. Therefore, these balance sheets can give you insight on where a company currently stands financially.

Asset Types

Current Assets – They have a life span of less than or equal to a year. They can be readily converted into cash. Examples include cash, accounts receivable, and inventory.

Non-Current Assets – These are assets that are harder to liquidate. Unlike current assets, they have a longer life span and aren’t cashed in within a year. Examples include buildings, land, computers, sturdy equipment, trademarks, patents, and copyright.
Assets always take account of depreciation and is reflected in the numbers.

Liabilities

Long-term – These are debts and non-debt financial obligations that are due after a period of one year of the balance sheet.
Current – They are liabilities that are due or will be paid within one year. This category also includes interest loan payments on long-term debt.

Shareholder’s Equity – This is the initial amount of money invested into a business. This category represents a company’s total net worth. Thus, if a company decides to reinvest its net earnings into the company, it is added to the shareholder’s equity account. Many may perceive this category as irrelevant if they aren’t a big company, but this is an important part of any business plan. This could represent an owner’s personal investments or borrowed investments.

How To Utilize the Balance Sheet

There are two popular calculations investors use when analyzing a balance sheet: debt/ equity ratio and . With debt/ equity ratios, you divide a company’s total liabilities over its shareholder’s equity. If the ratio is high, then it means the company has used debt to fund growth or control finances. You may want to research further to see if the debt reveals high potential investing or not. With working capital, you can determine a company’s short-term financial standing. If the result is positive, it means that a company has the ability to pay off its short-term liabilities. If the result is negative, it reveals that a company is unable to cover its short-term liabilities. As you may have guessed, the latter is not a good sign.

Debt/ Equity Ratio = Total Liabilities / Shareholders Equity
Working Capital = Current Assets – Current Liabilities

A few real-time balance sheets:

Google on Yahoo
Bank of America on Forbes
Goldman Sachs on Yahoo Finance

Now we’re not gonna lie. Balance sheets may not reveal the whole truth, since a lot of corporations stretch their accounting to appease investors. Despite Sarbanes-Oxley Act of 2002, accounting fraud is common.

Hopefully, you’ve learned how to utilize a balance sheet. Now you’ll have the ability to peer into companies that you may be investing in and see “what they’re working with”.

*Info courtesy of Investopedia.
Bookmark and Share
</