BALANCE SHEET explained

Introduction

This tutorial will help you understand what a balance sheet is, how to read one, and what the various components mean for assessing a company's financial health. By the end, you will be equipped to analyze a balance sheet and gain insights into a company's assets, liabilities, and equity.

Step 1: Understanding the Balance Sheet

• A balance sheet provides a snapshot of a company's financial position at a specific point in time.
• It consists of two main sections:
  • Left side: What the company owns (assets)
  • Right side: What the company owes (liabilities and equity)
• It is one of three key financial statements, along with the income statement and cash flow statement.

Step 2: Components of the Balance Sheet

• Assets: Resources owned by the company, split into:

  • Current Assets: Cash and other assets expected to convert into cash within one year (e.g., inventory).
  • Non-Current Assets: Long-term investments that cannot be quickly converted into cash (e.g., property, plant, and equipment).

• Liabilities: Obligations owed by the company, divided into:

  • Current Liabilities: Amounts due to creditors within one year (e.g., accounts payable).
  • Non-Current Liabilities: Amounts owed that are due after one year (e.g., long-term debt).

• Equity: Represents the shareholders' stake in the company, calculated as the difference between total assets and total liabilities.

Step 3: Reading a Balance Sheet

• Start by categorizing the information:
  • Look at current and non-current assets on the left.
  • Examine current liabilities, non-current liabilities, and equity on the right.
• Remember the accounting equation:

  Assets = Liabilities + Equity
  

Step 4: Analyzing a Real-World Example

• Use Walmart's balance sheet from January 31, 2020, as an example:
  • Total Assets: $236.5 billion
    • Current Assets: $61.8 billion
    • Non-Current Assets: $174.7 billion
  • Total Liabilities: $154.9 billion
    • Current Liabilities: $77.8 billion
    • Non-Current Liabilities: $77.1 billion
  • Equity: $81.6 billion

Step 5: Detailed Breakdown of Categories

• Current Assets may include:

  • Cash and Cash Equivalents
  • Accounts Receivable
  • Inventory

• Non-Current Assets may include:

  • Property, Plant, and Equipment
  • Intangible Assets

• Current Liabilities may include:

  • Accounts Payable
  • Short-term Debt

• Non-Current Liabilities may include:

  • Long-term Debt
  • Deferred Tax Liabilities

• Equity may consist of:

  • Common Stock
  • Retained Earnings

Conclusion

By understanding how to read and analyze a balance sheet, you can gain valuable insights into a company's financial health. Remember to look at the balance sheet in terms of assets, liabilities, and equity, and consider using real-world examples, like Walmart, to practice your skills. As you become more comfortable with these concepts, you will be better equipped to make informed investing decisions. If you have further questions, feel free to explore additional resources or reach out for clarification.