9.3 Balance Sheet

FINANCIAL STATEMENT ANALYSIS

Balance Sheet:

It is a summary of all the liabilities and assets of a company giving us a picture of the company's financial position (assets and liabilities) as on date. Liabilities are also termed as 'sources of funds' and assets as 'application of funds. The simple structure of a company's balance sheet is as given below. Investors often overlook the balance sheet. Assets and liabilities aren't nearly as interesting as revenue and earnings. While earnings are important, they don’t tell the whole story. The balance sheet highlights the financial condition of a company and is an integral part of the financial statements.

Indicator Of Company's Financial Health:

The balance sheet, also known as the statement of financial condition, offers a snapshot of a company's health. It tells you how much a company owns (its assets), and how much it owes (its liabilities). The difference between what it owns and what it owes is its equity, also commonly called 'net assets' or 'shareholder equity'. By subtracting a firm's liabilities from its assets, we can figure out what's known as its shareholders' equity, a term that simply refers to the total net worth of the company. This is a fundamental formula to remember:

Assets – Liabilities = Shareholders’ Equity (Net Worth)

Or

Assets = Shareholders' Equity + Liabilities

This is a simple but critical measure. While the sign of a healthy company is one of growing assets, it's more important to see increasing shareholder equity, since that reflects a company's health factoring in its liabilities. The balance sheet tells investors a lot about a company's fundamentals:

How much debt the company has? How much it needs to collect from customers (and How fast it does so), How much cash and equivalents it possesses and what kind of funds the company has generated over time?