A company’s balance sheet shows the company’s assets, liabilities and shareholders’ equity at a specific point in time.
What is a balance sheet?
The balance sheet is a financial statement that shows a company’s assets, liabilities, and shareholders’ equity at a single point in time—either year-end, quarter-end or some other date.
The balance sheet shows what the company owns, what it owes and the value of the shareholder’s investment in the company.
Along with the company’s income statement and cash flow statement, the balance sheet provides critical information that potential investors, creditors, and others can use in analyzing the company’s financial position. The balance sheet is a critical part of the analysis of a company’s key financial ratios.
Balance sheet format
The balance sheet is broken out in to three main sections: assets, liabilities, and shareholders’ equity:
Assets
Assets are what the company owns. A balance sheet will typically list assets starting with those that are most liquid, meaning those that can most easily be converted to cash.
Current assets are those that will typically be converted to cash within a year. Current assets typically include:
Cash and cash equivalents. This is cash in the bank—things like money market funds and cash instruments
Marketable securities, which are both equity and debt securities for which there is a liquid market
Accounts receivable,. which are payments due to the company
Inventories, which are finished goods that are ready for the company to sell
Pre-paid expanses, which reflect payments the company has made for future services like insurance, advertising, and other services the company has paid for and has yet to derive the full benefit of
Long-term assets are those that are not converted to cash within a year and have a longer-term useful life. Examples are:
Long-term investments of various types
Fixed assets such as buildings, machinery, equipment and other durable fixed assets.
Intangible assets or non-physical assets, such as a trademark
Liabilities
Liabilities represent amounts owed to creditors by the company.
Current liabilities are typically those for which payment is due within a year. Examples of current liabilities can include:
Accounts payable, which represents invoices from the company’s suppliers, vendors, and service providers
Current portion of long-term debt, which represents any portion of the company’s long-term debt that is payable within the next year
Interest payable
Rent, taxes and utilities that are currently due
Wages payable to employees
Prepayments from customers for services not yet rendered or goods not yet delivered to them. Pre-orders are a good example.
Dividends on the company’s stock that have been declared but not yet paid to shareholders
Long-term liabilities might include:
Long-term debt, which is debt that will be repaid over a time period that exceeds a year. It excludes the current portion of this debt.
Pension fund liability. For company’s that offer a pension to employees, these pension payments are a liability of the company and are based on an annual actuarial evaluation.
Deferred taxes, which are tax liabilities that the company has accrued but that will not be paid until a subsequent year
Note that some liabilities may be “off balance” sheet. These might include certain leasing arrangements or others. The classifications can change with changes in tax and accounting rules over time.
Shareholders’ equity
Shareholders’ equity is the balance attributable to the owners of the company, namely the shareholders. You can think of shareholder’s equity as the residual amount of the company’s assets less their liabilities, based on the balance sheet equation of assets minus liabilities equals shareholder’s equity.
A company with negative shareholder’s equity is likely one that is in financial duress.
The shareholders’ equity section of the balance sheet might include:
Retained earnings, which are the company’s net earnings that can be reinvested in the business or use to pay down debt
Treasury stock, which are shares of stock that have been authorized but not issued. This can also represent shares the company has repurchased in the open market via some manner of a stock buy-back program.
Common stock, which are the shares we normally see traded in the case of a public company. Preferred shares offer these shareholders a preference when dividends are declared or in the event of a liquidation of the company in bankruptcy.
Balance sheet example
Here’s an example of what a company balance sheet might look like. This is a simplistic example meant to illustrate the format. Depending upon nature of the company’s business, the level and types of debt the company employs, whether they have multiple share classes of the company’s stock, and other factors, there may be different line items under the various asset, liability, and owner’s equity sections.
Balance Sheet-XYZ, Inc. | |||
|---|---|---|---|
| Assets | |||
| Current | Prior | ||
| Current Assets | |||
| Cash and Cash Equivalents | $0.00 | $0.00 | |
| Marketable Securities | $0.00 | $0.00 | |
| Accounts Receivable | $0.00 | $0.00 | |
| Inventories | $0.00 | $0.00 | |
| Other Current Assets | $0.00 | $0.00 | |
| Total Current Assets | $0.00 | $0.00 | |
| Non-Current Assets | $0.00 | $0.00 | |
| Property, Plant, & Equipment | $0.00 | ||
| Goodwill | $0.00 | $0.00 | |
| Intangible Assets | $0.00 | $0.00 | |
| Investments in Other Companies | $0.00 | $0.00 | |
| Financial Long-Term Assets | $0.00 | $0.00 | |
| Total Non-Current Assets | $0.00 | $0.00 | |
| Total Assets | $0.00 | $0.00 | |
| Liabilities | |||
| 2017 | 2016 | ||
| Current Liabilities | |||
| Accounts Payable | $0.00 | $0.00 | |
| Short-Term Debt | $0.00 | $0.00 | |
| Current Income Tax Due | $0.00 | $0.00 | |
| Notes Payable | $0.00 | $0.00 | |
| Other Current Liabilities | $0.00 | $0.00 | |
| Total Current Liabilities | $0.00 | $0.00 | |
| Non-Current Liabilities | |||
| Long-Term Debt | $0.00 | $0.00 | |
| Deferred Income Tax Due | $0.00 | $0.00 | |
| Bonds Payable | $0.00 | $0.00 | |
| Capital Lease Obligations | $0.00 | $0.00 | |
| Other Non-Current Liabilities | $0.00 | $0.00 | |
| Total Non-Current Liabilities | $0.00 | $0.00 | |
| Total Liabilities | $0.00 | $0.00 | |
| Shareholders’ Equity | |||
| Capital | $0.00 | $0.00 | |
| Minority Interest | $0.00 | $0.00 | |
| Total Shareholders’ Equity | $0.00 | $0.00 | |
| Liabilities and Shareholders’ Equity | $0.00 | $0.00 |
Types of balance sheets
There are several balance sheet formats that companies might use.
Classified balance sheet
A classified balance sheet aggregates assets, liabilities, and shareholder’s equity into appropriate sub-categories within these broad headings, much as described in the sections above. This is the most common type of balance sheet presentation.
Common-sized balance sheet
A common-sized balance sheet goes a step further and contains a column showing the various assets, liabilities, and shareholder’s equity items as a percentage of assets, liabilities, or shareholder’s equity. This can provide users of the balance sheet with a more complete perspective than that afforded by simply looking at the raw numbers. Use of this format across multiple periods, such as year over year, can provide a quick way to spot major changes. For example, a big jump in accounts receivable might indicate a large bump in sales or it might indicate a problem with the company’s collection process. An analyst seeing this large percentage change will be prompted to investigate further.
Comparative balance sheet
A comparative balance sheet will present assets, liabilities, and shareholder’s equity listing totals for several periods on a side-by-side basis. This is a good tool for balance sheet users to quickly view changes in various categories over several periods.
Vertical balance sheet
A vertical balance sheet shows all categories in a linear column. Some balance sheet formats might show assets on the left with liabilities and shareholder’s equity on the right.
How to read a balance sheet
There is a lot of information contained in a company’s balance sheet. Reading a balance sheet is more than just looking at the numbers. The balance sheet can be a key tool in analyzing a company’s finances.
Financial ratios are an important analysis tool. There are a number of balance sheet ratios to be considered.
For example, the debt-to-equity ratio looks at the percentage of financing the company uses in terms of the level of borrowing compared to the equity of the shareholders. The number in and of itself is not all that meaningful. What is meaningful are trends in this ratio over time and how the company’s ratio compares to other firms in the same industry.
A utility will generally have a relatively higher debt-to-equity ratio than firms in many other industries. Comparing the ratio for an electric utility to that of a service provider is not meaningful, but comparing the ratio for several electric utilities is meaningful.
There are a number of ratios that are strictly balance sheet-driven and others that utilize data from the balance sheet and the income statement.
As mentioned above, looking at trends in the balance sheet is key. Are certain assets increasing or decreasing? Has the level of debt increased over time? Looking at balance sheet trends can reveal a lot.
It’s important to keep in mind that the balance sheet is only a snapshot in time. Things could change as soon as it’s generated. It’s critical to view the balance sheet in the larger context of the company’s business. The balance sheet should be viewed in combination with the company’s other financial statements to provide a true understanding of the company’s financial picture.
