Reading a Balance Sheet

Reading a Balance Sheet like a Pro Investor. Balance Sheet Understanding, Balance Sheet explained.

First, understand that the balance sheet is divided into a company’s assets and liabilities. The assets section in turn divides into fixed assets and current assets, while the liabilities section divides into three main sections: owners’ funds, long-term loans and current liabilities.

Balance Sheet Explained: Assets

Balance Sheet Understanding: Fixed Assets

What are fixed assets? These are the long-term assets held by the company, and typically include intangibles, net fixed assets and long-term investments.

Intangibles

This is a controversial term that has caused some confusion. It covers all assets that do not have a physical presence, and can include trademarks, patents, licenses and most commonly, goodwill.

Net fixed assets

These usually come from the fixed initial capital outlay needed to start a large business, perhaps the largest starting expenses. Common items listed include: land, buildings, equipment, plants, computers, office items. In order to value the items accurately, the accumulated depreciation is deducted from the items’ initial cost.

Long-Term Investments

Long-term investments usually refer to shares in other companies held for trading purposes. These are investments in non-consolidated companies.

Balance Sheet Understanding: Current Assets

What are current assets? These are the short-term assets held by the company, and typically include inventories or stocks, accounts receivable and cash. These assets are in constant movement from one category to another.

Inventories

These include raw materials, semi-finished goods or finished goods – any component of the production process that has yet to be sold.

Accounts receivable

Once the finished goods are sold, they are converted into accounts receivable on the balance sheet.

Cash

And once the accounts receivable are settled, they are converted into cash. This section of the balance sheet also includes cash-equivalents such as liquid securities and short-term bank deposits.

Balance Sheet Explained: Liabilities

More on the Liabilities section of the balance sheet: What is a Balance Sheet.

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