As a continuation of Fundamental Analysis Series, let us learn about balance sheets of a company and how to interpret it and how to utilize a balance sheet of a company.
What is Balance Sheet?
Balance sheet of a company indicates how healthy is a company with respect to financial factors. It lists the assets and liabilities of a company and you should remember that assets and liabilities are not same as revenue and earnings. Broadly balance sheet has the following components
There are two types of assets
It includes assets that be converted into cash in a financial year.It includes ready cash,inventories and receivables. A company with high cash holding in its balance sheet is a good bet compared to a company with debt or less cash. Inventories are nothing but goods which are yet to be sold to consumers and receivables are bills which are pending payment to the company.
Non Current Assets:
These are assets which are not very liquid and can not be converted to cash quickly. These include Land,machinery etc.
These are again classified into two types.
These are debt which needs to be repaid within the current financial year.
These are long term debt in the form of bank debt or bonds borrowed.
Equity or Shareholder's equity:
Shareholder's equity is nothing but
Equity = Total Assets - Total Liabilities
Amount of money the company collected during its IPO(Initial Public Offer).
It is the amount of earnings that the company has reinvested in the business rather than paying it back as dividend to the share holders.
So these are the important components of a balance sheet though there may be few other. So as an investor one can derive very useful insight about the company financial health from its balance sheet and make a good decision on his investment.