Analyzing a Balance Sheet

Business.com / Accounting / Last Modified: February 22, 2017

A balance sheet, also known as a statement of financial position or statement of financial condition, is a report that shows all the ...

A balance sheet, also known as a statement of financial position or statement of financial condition, is a report that shows all the items owned or controlled by a company, the ownership interest in the company, and the debts the firm has incurred. Knowing how to analyze a balance sheet is essential, whether you're considering acquiring a firm or just trying to strengthen and troubleshoot your own business. Getting started:

  1. A balance sheet follows the formula of assets = liabilities + owners' (or shareholders') equity
  2. A balance sheet depicts a particular point in time, usually the last day of the quarter or fiscal year, and reflects the balances, or values, of the assets, liabilities and equity on that day.
  3. A balance sheet reveals a firm's financial condition, while an income statement shows profit performance.

Learn the basics before you begin to analyze

It's difficult to analyze a balance sheet if you're not familiar with the basic terms and concepts involved, such as accounts receivable, cash and cash equivalents, intangible assets, and liabilities.

Watch assets, liabilities and equity

A balance sheet includes a catalog of the assets of a company plus the portion of assets financed by equity and by debt. A balance sheet typically will list assets, which can include property, equipment and other assets, on the left side of the sheet. Liability and stockholder equity, which can include current liabilities, long-term liabilities and stockholders' equity, is listed on the right. The total on the left side must equal the total on the right side.

Calculate the ratios

There are several tools available to help calculate important ratios, including return on assets (ROA) and return on equity (ROE). These tools can be used to analyze profitability, liquidity and long-term financial strength.

Find balance sheets online

There are many places to look for a company's balance sheet, including its annual report and company information or investor relations section of its Web site.
EDGAR website or Hoovers to find a specific public company's balance sheet.
  • "Balance sheet" is one of the most misused terms in business. Financial journalists and investors often use it - incorrectly - when they mean such things as a company's overall financial condition or its profitability.
  • To best gauge a company's financial position, examine its latest balance sheet and compare it to prior balance sheets and other operating statements.
  • Compare current assets to current liabilities to identify potential cash flow issues.
  • The devil is in the details: Check the footnotes for revealing and crucial details vital to understanding a company's financial health.

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