Every time you get a company’s annual report or 10-K, you will find dozens even hundreds of pages of tables and numbers. Those figures are important for each of your investment decision. That figures and tables pages are the balance sheet.
A company’s balance sheet is a financial statement from a company reporting its financial health. Thus, you need to analyze the balance sheet in order to gain some pieces of meaningful information.
The Definition
A Balance sheet gives you information about the company’s assets, liabilities, and how much the shareholders own. With that information, later you can tell if a business is worth your investment or not.
Other than that, you can even know the company’s potential problems if you combine that information with the information you retain from the company’s accounting records and disclosures.
The Importance of Balance Sheet in Financial Statements
Investors annually evaluate a company’s financial statements. Within those financial statements, there are three important parts they need to examine, they are balance sheet, income statement, and cash flow statement.
Balance sheets tell investors the amount of money the company has (the assets) and the amount of money owed by the company (the liabilities). Besides, the balance sheet also tells what is left if you net those two together, including the net worth, shareholder equity, or book value).
While the income statement is a record of the profitability of a company. In other words, it gives you information about how much money the company makes or loses.
The last part is the cash flow statement. Its records of comparison between the company’s income statement and its actual changes in cash. It shows where the cash goes in and where it disburses.
The Decision You Can Make Based on that Information
Once you understand the ways to analyze a company’s financial information, you can decide these things
- The amount of a company’s debt relative to its equity
- The speed of its customers paying their bills
- The condition of the company’s short-term cash, declining or increasing
- The percentage of the company’s important assets
- The percentage of products being returned at higher than average rates in its history
- The resulting research and development budget
