how to read a balance sheet of stock or company

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How to read balance sheet
How to read balance sheet

If you pick stocks, you MUST learn how to read a balance sheet. Here’s everything you need to know:

The balance sheet is one of the 3 major financial statements. It shows:

Assets: What a company owns

Liabilities: What a company owes

Shareholders Equity: The net worth attributable to its owners (shareholders) At a fixed point in time

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How to read a balance sheet of a company important points

That “at a fixed point in time” part is key! A balance sheet is a SNAPSHOT of a company’s net worth at a POINT in time, usually measured at the end of a quarter/year. That differs from an income statement or cash flow statement, both of which are measured over a PERIOD of time

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Balance sheet Point in time vs Point of time

Most public companies show their balance sheet in their quarterly earnings press release, but not always Find them by looking at:

10-Q (quarterly report)

10-K (annual report)

Aggregator websites ( third party site or brokers )

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SEC forms which includes balance sheet information

All balance sheets follow the same formula: Assets = Liabilities + Shareholders Equity This formula must be in balance at all times (Hence the term “balance sheet”)

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Balance sheet formula : A = L + E

Companies get leeway in how they categorize each item on their balance sheet This graphic shows some of the most commonly used categories & terms

Let’s start with assets, which is what a company OWNS Assets are listed in order of LIQUIDITY, which means how quickly a security can be turned into cash The most liquid assets are at the top, the least liquid on the bottom

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Assets in balance sheets range from most liquid to least liquid

There are two categories of assets:

Current assets: Assets that are expected to be used in <1 year

Long-term assets: Assets that a company will benefit from for >1 year

Common current assets:

▪️Cash: Checking account, t-bills, CDs w/ <3 maturity
▪️Marketable Securities: Stocks, bonds…etc that can easily become cash
▪️Accounts Receivable: Money it is owed by its customers
▪️Inventory: Unsold goods
▪️Prepaid expenses: Insurance, rent, etc…

Long-term assets come in 2 forms:

1: Tangible Assets (You can touch them)
▪️Buildings
▪️Equipment
▪️Property
▪️Stores

2: Intangible Assets (You can’t touch them)
▪️Trademarks
▪️Goodwill (premiums paid to make an acquisition)
▪️Patents
▪️Stocks/Bonds held >1 Year

Now for Liabilities, which are what a company OWES

There are 2 categories of liabilities:

1: Current liabilities:
▪️Bills that will be paid in <1 year

2: Long-term liabilities:
▪️Bills that are due in 1+ years

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Balance sheet include liabilities

Common current liabilities (due <1 year):
▪️Short-term debt
▪️Accounts payable (money owed to suppliers)
▪️Interest
▪️Unpaid Wages
▪️Dividends
▪️Taxes

Common long-term liabilities (due 1+ years):
▪️Long-term debt (also called “Notes”)
▪️Customer pre-payment
▪️Taxes
▪️Pension

Finally, there is “Shareholders Equity This is money attributable to the business owners (shareholders) It’s kind of like a company’s “net worth”

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Balance sheet factor : shareholder equity

Common categories:

▪️Common Stock: Money invested in the company
▪️Additional Paid-In Capital: Amount shareholders have invested beyond common/preferred stock
▪️Retained Earnings: Net profits a company reinvests in the business
▪️Treasury Stock: Money used to buy back stock

Here’s an example of a real balance sheet This is taken from Home Depot’s balance sheet as of July 31st, 2022

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How to read balance sheet , example : Home Depot

Notice that it’s Shareholder Equity is really low? Don’t worry — that’s just because of the company’s massive stock buyback program ($84.5 billion spent so far) Treasure stock is listed as a negative number in shareholder’s equity