A balance sheet shows what a company owns and owes at a specific point in time. Using this information, financial professionals can evaluate the health of a business. Often, a balance sheet will be used by creditors and lenders to determine whether a company qualifies for bank loans or credit card lines of credit. It is also used by investors to evaluate a business’s potential.
A balanced sheet is organized into three columns, with assets listed on the left and liabilities and equity detailed on the right. This format is designed so that the total dollar amount of assets always equals the total dollar amount of liabilities and shareholders’ equity.
Assets include concrete items like cash, inventory and property and equipment owned. They also include intangibles of value, such as patents and trademarks held. The assets are grouped into categories according to their level of liquidity, with the most liquid items (cash and cash equivalents) appearing first. Then, other assets are sorted by their liquidity, with the more difficult to liquidate assets appearing towards the bottom of the list.
Liabilities include the money a company owes to others, including accounts payable and taxes payable. The most important thing to note about this section is that it includes both current and long-term debt. Long-term debt could include corporate bonds, mortgages or pension obligations. The next section of the balance sheet reports the company’s shareholder’s equity, which consists of the amount of money that shareholders have invested in the business, plus any dividend payments. This is the last section that appears on a balance sheet.
Since a balance sheet is a snapshot of a moment in time, analyzing trends and ratios is a helpful way to assess a company’s financial health. Typically, the balance sheet will contain data from several past reporting periods to facilitate comparisons. The percentage changes from one period to another can show how the business is growing or shrinking.
To make the most of a balance sheet, you should use it in conjunction with other financial statements. A profit and loss statement shows a company’s income or losses, while an income statement describes the source of those earnings. Both of these statements are essential in evaluating the company’s cash flow, which will ultimately determine how much debt it can take on and what investments it can make. In addition, a cash flow statement can be used to gauge how efficiently the company is using its current assets. To do this, divide the company’s net income into its liabilities and equity to get a Return on Invested Capital (ROIC) figure. Bilanz