The balance Sheet Explained
A company financial statement!

The balance sheet, or statement of financial position, forms part of the annual stock report. It provides a snapshot in time of the company's liquidity and solvency and consists of three parts.

The assets part tells you what the company owns. This is divided into two sections. The current assets section tells you how much cash (liquid assets) is available together with how much can be converted into cash within a year.

Additional assets or non-current assets including investments, property and plant are added to the current assets to give total assets.

Below the total assets are listed the items that tell you something about the company's liquidity. These are the curent liabilities,

A company whose current assets do not meet their current liabilities has a liquidity problem. The current ratio is the ratio of current assets to current liabilities and measures liquidity. A ratio greater than one is desirable.

This ratio allows easy comparison with other companies. A current ratio that is trending higher over the last several years is good, but if it heading south it is not so good.

Working capital, which is current assets less current liabilities, can be a source of funding, but is not long-term.

Underneath the total current liabilities are listed the non-current liabilities including the long-term debt. Current and non-current liabilities are added together to give the total liabilities.

Long-term debt is any interest-bearing debt not payable within one year. It also includes capitalised leases. Long-term debt is the other major source of capital for a company beside shareholders equity.

Shareholders Equity is the capital invested from shareholders through their shareholdings together with retained profits. That is, profits not distributed as dividends.

Shareholders equity is measured by adding share capital, reserves, retained profits and minority interest. It is equivalent to book value.

The ratio of long term debt to shareholders equity is called the debt to equity ratio. It is a measure of the solvency of the company.

A company that is able to borrow long-term at cheap rates and generate high returns on their debt are using debt wisely.

Companies with a high return on capital (debt plus equity) are examples of companies that succeed in this respect. They are companies that value investors like me look for.

Total liabilities, together with shareholders equity balance total assets. Hence the name balance sheet.

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