Balance Sheet: How to Read, Components, and Example The Motley Fool

A balance sheet is also useful to creditors who want to assess a company’s ability to repay debts before making new loans. For example, if the company has limited liquidity, as evidenced by current assets essentially matching current liabilities, then a creditor might be hesitant to provide short-term debt. They might instead offer long-term debt at a higher interest rate, for example, or ask for collateral to reduce risk. With this information, stakeholders can also understand the company’s prospects. For instance, the balance sheet can be used as proof of creditworthiness when the company is applying for loans. By seeing whether current assets are greater than current liabilities, creditors can see whether the company can fulfill its short-term obligations and how much financial risk it is taking.

A balance sheet can be used to analyze a company’s financial standing in several ways. For one, looking at its liabilities vs. assets can show whether the company is getting in over its head with debt. Digging deeper, looking at details like current assets vs. current liabilities, you can see if a company has solid liquidity to meet its short-term debt obligations. Similarly, you can assess long-term solvency by seeing if the company has the assets needed to cover long-term debt obligations.

You can start by listing your assets, including your cash, investments, accounts receivable (money you’re owed), any inventory you own, property you have, and so forth. The biggest liability on Apple’s balance sheet is its long-term debt, which stands at about $95.3 billion. It also has a smaller amount of short-term debt plus about $63 billion in accounts payable (e.g., to its part suppliers). Although Apple has almost $109 billion in current and noncurrent “other” liabilities — certainly a lot of money — the key point is that this is a very broad category.

Limitations of Financial Statements

A balance sheet serves as reference documents for investors and other stakeholders to get an idea of the financial health of an organization. It enables them to compare current assets and liabilities to determine the business’s liquidity, or calculate the rate at which the company generates returns. Comparing two or more balance sheets from different points in time can also show how a business has grown. A balance sheet is one of the most essential tools in your arsenal of financial reports. Generally speaking, balance sheets are instrumental in determining the overall financial position of the business. The balance sheet includes information about a company’s assets and liabilities.

Financial Strength Ratios

Investors can gain valuable insight from this financial statement since it shows a company’s resources and how it is funded to evaluate its financial health. Furthermore, the balance sheet is a key source for analyzing the various performance metrics of a company, such as its return on assets ratio, debt-to-equity (D/E) ratio, and liquidity ratio. There are three main ways to analyze the investment-quality of a company through its balance sheet. First, the fixed asset turnover ratio (FAT) shows how much revenue a company’s total assets generate.

Equity

An investor can use a balance sheet to help determine the company’s short- and long-term financial health. Investors can also compare a company’s current balance sheet and related financial ratios to its past balance sheets and/or to the ratios of other companies. The primary financial statements of for-profit businesses include the balance sheet, income statement, statement of cash flow, and statement of changes in equity. Nonprofit entities use a similar set of financial statements, though they have different names and communicate slightly different information. Balance sheets measure profitability and keep your finger on the pulse of a firm’s financial health. When paired with other financial statements and accounting software, they offer context for a business’s financial position.

In order to get a more accurate understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement. In order to get a complete understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement. The term balance sheet refers to a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company’s capital structure.

1. In all, Apple has about $290.4 billion in liabilities reported on its balance sheet.
2. Most of her assets are sunk in equipment, rather than quick-to-cash assets.
3. Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing.
4. Investors can look at a company’s assets and liabilities, as well as calculate metrics like ROE before deciding to invest in a particular company.
5. The components of a balance sheet include assets, liabilities, and shareholder equity.

FAQs about balance sheets

Whether you’re facing a downturn or expecting growth, the balance sheet can help explain why. Balance sheets give an at-a-glance view of the assets and liabilities of the company and how they relate to one another. Fundamental analysis using financial ratios is also an important set of tools that draw their data directly from the balance sheet.

If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the Balance Sheet. According to the equation, a company pays for what it owns (assets) by borrowing money as a service (liabilities) or taking from the shareholders or investors (equity). The left side of the balance sheet is the business itself, including the buildings, inventory for sale, and cash from selling goods. If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the balance sheet.

Such asset classes include cash and cash equivalents, accounts receivable, and what do you mean by balance sheet inventory. It is important to note that a balance sheet is just a snapshot of the company’s financial position at a single point in time. It’s also worth mentioning that shareholders’ equity and a company’s market capitalization (the market value of its stock) are often very different numbers. That is especially true if a company can generate high returns on its assets or it’s growing rapidly. A company’s balance sheet contains important information about how much money the company has, how much it owes, and more.