how to read a balance sheet of stock or company

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

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

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 )

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”)

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

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)

2: Intangible Assets (You can’t touch them)
▪️Goodwill (premiums paid to make an acquisition)
▪️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

Balance sheet include liabilities

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

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

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

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

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