In this series of posts we cover the different elements of a balance sheet in some level of detail to understand this important part of a company’s financial position.  By understanding the results in a balance sheet you are on your way to forming an opinion on the company you’re researching.

A company balance sheet is just a snapshot of a company at a certain point in time.  Yet it contains a lot of information about how a company is doing and should be an important step in your investment decision process.  When reviewing a company’s annual report you will review the balance sheet of the company as of their last fiscal day of their fiscal year. The balance sheet is broken in to three sections; Assets, Liabilities, and Shareholders’ Equity.

The assets of the company are listed on the left hand side of the balance sheet and include anything that the company owns and anything owed to the company.  This includes things like inventory, cash, equipment and land owned by the company.

A company’s liabilities are listed on the right side of the balance sheet and represent what the company owes to others.  Liabilities would include interest payments on debt, unpaid taxes and unpaid supplies

Shareholders’ Equity also appears on the right side of the balance sheet and is consider the net worth of the company.  It represents the total remaining after subtracting assets from liabilities.  This value is the total amount that shareholders would receive if the company decided to liquidate everything and close up shop on the day the balance sheet is created (also known as book value).  Although this number is only theorhetical since there are more factors concerning growth potential and profit potential that would alter the actual value of their shares.

These three items come together with assets on the left side of the equation and liabilities and shareholders’ equity on the right to create a balanced formula.  The numbers will always add up to even and the formula is incredibly simple:

Assets = Liabilities + Shareholders’ Equity

Part 2 of the Balance Sheet Breakdown will cover the Assets portion of the balance sheet in detail where you’ll learn more than you thought possible about different types of assets.

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