The balance sheet shows a company’s financial position by reporting on assets, liabilities and shareholders’ equity on a specific date. It shows what a company owns and owes, as well as shareholders’ ownership. A balance sheet is one of the core financial statements every public company needs to issue regularly.
Balance sheets for public companies have three definitive sections: assets, liabilities and equity.
The balance comes from looking at what’s owned vs. owed: Assets = Liabilities + Shareholder Equity.
Assets are what the company owns, and include both current and fixed assets.
Liabilities are debts owed by the company, including loans.
Equity represents the amount of business equity offered by shareholders.
Balance sheets provide a great snapshot show of the company’s general financial health. Ultimately, the balance sheet shows the net worth of a company. But balance sheets are not indicative of trends. There is no perspective on cash flow. Balance sheets are also relatively easy to manipulate through creative, but legal accounting practices. The balance sheet is best reviewed together with income and cash flow statements. These other financial reports provide important context for the assets, liabilities and equity recorded on the balance sheet.
Understanding a balance sheet means being able to draw conclusions about the financial health of a company and its future wealth prospects. It helps investors to identify investment opportunities and avoid pitfalls. These reports determine if the company is a good investment or not.
Sven Franssen