Balance sheet, also known as Balance Sheet in English, is sometimes called "statement of financial position". It shows the financial status of a company on a specific date and reflects the company's assets, liabilities, shareholders' equity, etc. at a certain point in time. It is one of the company's important financial statements. Analyze the growth or decrease in a company's assets, liabilities, and shareholder equity over a period of time by comparing it with the company's historical balance sheet. The balance sheet, along with the income statement and cash flow statement, are the three most important financial statements and the analytical basis for investment decisions. So, what are the main components of a balance sheet, and how to read a balance sheet? This article will answer you one by one. For example, when a company obtains a $50,000 loan from a bank, its assets increase by $50,000 and its liabilities also increase by $50,000. If the company receives $90,000 in investment capital from shareholder financing, then its assets increase by $90,000 and shareholders' equity increases by $90,000. For investors, you can analyze the balance sheet to understand what resources the company mainly uses, how to obtain funds, profitability, debt-to-equity ratio and other information, so as to comprehensively judge whether the company is worth investing in. At the same time, you can compare the balance sheets of similar companies to compare company health. It should be noted that the balance sheet only shows information at a specific point in time (for example, a certain month or quarter of a certain year). It is a static reflection of the company's operating activities and needs to be compared with past balance sheets. At the same time, the values on the balance sheet may differ due to different depreciation calculation methods or accounting calculation methods, so that the values on the balance sheet cannot fully reflect the actual situation. Therefore, the balance sheet is often used in conjunction with other financial statements (such as the income statement, cash flow statement, and statement of changes in stockholders' equity) to further understand the company's operations. What are the components of a balance sheet? The balance sheet mainly consists of three parts, namely: Asset Liability Sharehold’s Equity assets Assets refer to all assets owned by a company, mainly including Current Assets and Non-Current Assets. Among them, non-current assets are often called long-term assets (Long-Term Assets). On a balance sheet, assets are generally arranged from top to bottom according to their liquidity. The most liquid assets, such as cash and cash equivalents, are listed at the top, while less liquid long-term assets are listed at the bottom. The main contents included in current assets and non-current assets are: current assets Current assets refer to assets that a company can turn into cash or use to repay short-term debts within one year, including cash, accounts receivable, inventory, etc. Items included in current assets Cash and cash equivalents Checks, bank account deposits, etc. Marketable Securities Short-term investments held by a company that can be quickly sold and converted into cash, including stocks, short-term bonds, and other liquid investments. Securities can also be classified as "cash equivalents". Accounts Receivable Payments that the company has not received from customers for selling goods or providing services will usually be recovered within the next 30 to 60 days. Inventory Finished goods, work in progress and raw materials stored in warehouses. Prepaid Expenses Expenses paid by a company in advance for operating operations, including insurance, advertising contracts, or rent. non-current assets Items included in non-current assets Tangible Assets
Land, Machine, Equipment, Building, etc., these are the company’s tangible fixed assets Intangible Assets Patents, Trademarks, Brands, Intellectual property, Goodwill, etc. Liabilities Liability refers to all the company's current loans, debts, wages payable, taxes and other items that should be paid. It is important to note that liabilities represent obligations or liabilities that a company must repay to creditors who have priority over the company's assets. In other words, if the company liquidates all its assets, these liabilities need to be paid off first. At the same time, liabilities indicate the source of a company's assets. For example, a company can increase its cash amount (assets) by borrowing money (liabilities). Liabilities mainly include: Current Liabilities and Noncurrent Liabilities. Likewise, non-current liabilities are often called long-term liabilities (Long-Term Liabilities). The main contents of current liabilities and non-current liabilities include: current liabilities Items included in current liabilities Accounts Payable Including water and electricity bills, network rental fees, employee wages, etc. Tax Liabilities Various taxes and fees incurred during company operations. non-current liabilities Items included in non-current liabilities Loans A loan resulting from borrowing money from a bank. Long-Term Debt Includes any interest and principal on bonds issued. Pension Fund Liability The company needs to pay money into employee retirement accounts. Deferred Tax Liability The taxes that may arise due to adjustments and other situations in the future are the taxes payable in the future. Shareholders' equity Shareholder’s Equity in English, also known as “Owners’ Equity” or “Book Value”, refers to the remaining assets after deducting all the company’s arrears. Therefore, the calculation formula for shareholders’ equity is as follows: Stockholders’ Equity = Assets – Liabilities Depending on how the company operates, there may be preferred stock (Preferred Stock), common stock (Common Stock), and usually retained earnings (Retained Earnings). Items included in shareholders’ equity Preferred Stock The assets of the company's earnings that are distributed first to shareholders holding preferred shares Common Stock The assets allocated to shareholders of common stock from the company’s earnings Retained Earnings The company withdraws part of its past profits to retain internal savings in the company. This part of the assets will not be distributed to shareholders as income. How to read a balance sheet? This chapter uses Apple's September 2023 balance sheet as an example to explain the components of its balance sheet. As can be seen from Apple’s balance sheet: The data in this balance sheet is as of September 30, 2023, and the data is compared with the data as of September 24, 2022. Total assets for the period were $352,583, of which current assets were $143,566 and non-current assets were $209,017. Total liabilities for the period were $290,437, of which current liabilities were $145,308 and non-current liabilities were $145,129. Stockholders' equity for the period was $62,146.
What financial information can be read from the balance sheet? Based on the different data published in the balance sheet, a number of data related to the company's finances can also be calculated, such as quick ratio, current ratio, etc. current ratio Current ratio, also known as Current Ratio in English, indicates the company's ability to use current assets to repay current debts and is an important indicator of a company's liquidity. Current ratio = Current assets ➗ Current liabilities The higher the current ratio, the greater the company's current assets and its ability to pay its current liabilities. Generally speaking, a current ratio greater than 2 is a benign signal. quick ratio Quick ratio, also known as Quick Ratio in English, is mainly used to measure the liquidity of a company's operating assets excluding inventory. Current assets ratio = (cash and cash equivalents + accounts receivable) ➗ Current liabilities The quick ratio is a measure of a company's liquidity, similar to the current ratio, but its calculation is more conservative. It believes that only assets that can be quickly converted into cash, such as cash and cash equivalents and accounts receivable, can be used to repay current liabilities. Inventories and prepaid expenses cannot be used to repay current liabilities. working capital Working capital, also known as Working Capital in English, is calculated as the difference between current assets and current liabilities and is used to measure a company's ability to repay current debts, including paying wages, paying operating bills and short-term loans. working capital = current assets – current liabilities The higher the value, the better the company's ability to repay short-term liabilities. Asset-liability ratio Debt-to-Asset Ratio in English is used to measure the ratio of total liabilities to total assets and is an important leverage ratio. Asset-liability ratio = Total liabilities ➗ Total assets The higher the asset-liability ratio, the greater the company's reliance on debt financing and the greater its financial risk. debt to equity ratio Debt-to-Equity Ratio, also known as "Debt-to-Equity Ratio" in English, reflects the extent to which a company finances through debt and its own capital. The higher the debt-to-equity ratio, the greater the company's reliance on debt financing and the higher its financial risk. The calculation formula is as follows: Debt to Equity Ratio = Liabilities ➗ Shareholders’ Equity Encyclopedia of American Brokerages U.S. Brokerage Ranking and Comparison [2024] Recommended Top 12 U.S. Brokerages More company valuations What are minority interests? How to handle the profits of subsidiaries? What is Shareholders’ Equity? Shareholders’ Equity What is the Price to Cash Ratio (P/CF)? How to calculate? What is Operating Expense OpEx? Operating Expenses What is Cost of Goods Sold (COGS)? How to calculate? What is company profit? Gross profit, operating profit, net profit What is enterprise value multiple? Enterprise Multiple What are preferred shares? Preferred Stock What is operating leverage? Degree of Operating Leverage What is debt service ratio? Debt Service Coverage Ratio