5 Mantras To Read A Company’s Balance Sheet

5 Mantras To Read A Company’s Balance Sheet

1. Financial Position: A balance sheet is one of three important statements for companies, along with a profit & loss statement and cash flow statement. A balance sheet shows the financial position of a company as on a particular date. It is an overview of the business.

2. Sources and Uses of Funds: A balance sheet is divided into Sources of Funds and Application of those Funds. This statement tells us where the management has got its funds from and how it is being used. Sources of funds could be from raising equity, taking on some debt, sale of assets, etc. Whereas, application of funds includes operating expenses, asset purchases, decrease in a liability, etc. All figures in a balance sheet are updated to current value. .

3. Shareholder’s Equity: Shareholder’s Equity is the money that the shareholders would get if the business was liquidated immediately. If the company is doing well, the shareholder’s equity keeps increasing. It does not, however, include retained earnings of the company.

Shareholder’s Equity = Assets – Liabilities 

4. Assets: Anything owned by the company is an asset. Assets could be Current or Non-current. Current assets are assets that can be easily liquidated such as cash, accounts receivable, inventory, marketable securities, etc. Non-current assets are more permanent in nature and cannot be liquidated as fast. Examples are Land, plant and machinery, other equipment, goodwill, etc.

5. Liabilities: Anything owed by the company is a liability. Similar to assets, liabilities can be Current and Non-Current in nature as well. Current liabilities would be accounts payable, overdraft, etc. These are payments that need to be made in the short-run. Non-Current liabilities are loans, leases, bonds etc., that are more long-term in nature. 

Also Read: 7 Red Flags to Look at While Studying the Financial Statements