What is it?
A Balance Sheet is a financial statement that shows the economic and financial situation of a company in a specific moment.
It is structured throughout three patrimonial concepts: assets, liabilities and shareholders’ equity. Assets is what a company owns, available to meet debts, commitments or legacies.
Liabilities are what the company is responsible of, especially an amount of money owed.
And Shareholders’ Equity is also known as Share Capital is equal to a company’s total assets minus its total liabilities. It represents the book value of a company.
The balance sheet is a snapshot at a moment in time. By itself, it can’t give a sense of the tendencies that play in the long term; this is why balance sheets are compared year by year in a corporation.
What can you analyze with the Balance Sheet?
- You will be able to tell how much money does the company has, how much it owes and what is left when you net these two.
- The income statement: you can see the firm’s profitability: how much money it made or lost.
- How quickly customers are paying their bills.
- Where profits are being reinvested or spent
- What’s happening with the short-term cash: is it declining or increasing?
Importance of a balance Sheet:
You can look at the balance sheet on its own or you can compare it with other statements like, for example, cash flow. This will let you know the company’s health. There are 4 important takeaways:
- Liquidity: compare a company’s current assets to its liabilities to have a glimpse of liquidity. Make sure the current assets are greater than the liabilities, this way; the company will be able to cover its short-term obligations.
- Leverage: how the company is financed tells a lot about the how much financial risk is taking.
- Rates of return: how well a company generates returns? You can see this in ratios as: ROE (return on equity) and ROA (return on assets).
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