What is a Balance Sheet?
A balance sheet is an important financial statement made by a company, providing a snapshot of its financial situation, including its assets, liabilities, and shareholders’ equity.
Think balanced scale. A balance sheet is a financial equation that’s like a scale perfectly balanced at any point in time. It’s one of the most widely cited financial statements, and shows the value of a company’s total assets (what it owns) as equal to the sum of its liabilities (what it owes, like long-term debt, bills due, etc.) and shareholders’ equity (which is like the “net worth” of shareholders of the company assuming their net worth were tied solely to the particular company being considered). Analysts and investors use the balance sheet to learn more about which funding sources a company uses to support its growth and operations.
Let’s look at a real-world example, the balance sheet of Apple for the fiscal year ending on September 29, 2018: $366B (assets) = $259B (liabilities) + $107B (shareholders’ equity). Apple’s assets include things like its fancy headquarters building in California, its valuable patents, and its huge piles of cash. Its liabilities include monies it owes others. And its shareholders’ equity is the difference between the two.
A balance sheet is like taking a financial portrait of a company with a polaroid camera...
It’s a snapshot, taken at one point in time, that helps capture a company’s health by showing the value of its assets (how much a company owns), liabilities (how much a company owes), and shareholders’ equity (what shareholders’ would theoretically get paid for the shares if the company closed, paid its debts, or sold its assets). In this bread-and-butter financial statement, assets are always equal the sum of liabilities and shareholders’ equity.
Public companies are required by regulators (like the Securities and Exchange Commission in the US) to file certain financial updates quarterly with the public. Balance sheets are one of those required disclosures. You can typically find them within the quarterly earnings reports that are posted on a company’s investor relations webpage. Private companies, on the other hand, don’t have to publicly disclose their financials. They tend to share their balance sheets only with their board of directors and some of their largest shareholders.
There are three parts to the balance sheet equation, with assets equal to liabilities (how much a company owes) and shareholders equity (essentially, the net worth of the company or the difference between assets and liabilities).
Looking at this statement, you’ll see that assets have the same value as total liabilities plus total shareholder equity. On balance sheets, assets and liabilities are typically listed in order of how easily they can be converted into cash, which in financial lingo, is expressed as how “liquid” they are. Assets are typically organized ranking from most liquid (cash, or easiest to turn into cash) to least liquid (hardest to convert to cash, like land or property), while liabilities tend to be organized from short to long-term obligations.
Balance sheets are another place where it can come in very handy to have an investor toolbox, with more ratios.
One example is debt-to-equity ratio: This is calculated by dividing a company’s total liabilities by its shareholder equity (the amount shareholders’ shares would be worth if a company shut down, sold its assets, or paid its debts), and can help investors better understand how a company’s capital structure is tilted either toward debt or equity financing.
Other financial analysis ratios pull information directly from balance sheets. These fall into two main categories:
An asset is something a company owns that has value, either direct financial value (like cash) or value to run the business (like equipment or inventory). There are two main types of assets:
Liabilities are what a company owes to outside parties, and they can be long or short-term liabilities.
In the balance sheet equation, shareholders’ equity is equal to the difference between total assets (what a company owns) and total liabilities (what a company owes). Another way of thinking about shareholders’ equity is that it represents what the net worth of shareholders’ would be, if their net worth were tied solely to the particular company being considered.
Shareholders’ equity is not the same as the real-time value of the shareholders’ stock, based on the stock price. It’s often a more conservative calculation, based on the book value of a company’s assets and liabilities. Market value is different, it’s based on investors’ perceptions of value, which is more volatile. Shareholders’ equity calculates what shareholders’ stakes would be worth if the company were to shut down — what would be left-over when the company pays all its debts and sells all its assets. That’s shareholders’ equity.
Balance sheets are one part of the trifecta of financial statements that can offer key insights into how a company supports its expenses, and how efficiently (or inefficiently) it runs. It’s a snapshot that can be taken at any point in time. The other two key financial statements are the income statement and cash flow statement, which highlight other elements of a company’s financial status. Balance sheets can help investors quickly understand a company’s financial well-being, and they’re useful to creditors and lenders, too. The equation can help lenders (such as a bank) determine if they should extend credit to a business, or if they should reel in their existing credit to that company.
While balance sheets can be very helpful, they have their caveats. Here are a few:
We like how the SEC has more helpful material on financial statements like the balance sheet that you can check out here.
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