How Do I Interpret Balance Sheets

Balance Sheets Income Statement Financial

Balance Sheet

A balance sheet – which is commonly conceived as a “statement of financial position” – reveals the basic financial condition of a corporate entity. Balance sheets do this by showing a company’s assets, liabilities and owners’ equity (net worth). If you be a shareholder in a company, it is vitally important that you to know how to read a balance sheet and be able to analyze it accurately.

Below are the critical components of interpreting balance sheets:

Balance Sheet Equation

The main formula behind a balance sheet is: assets = liabilities + (shareholder) equity

Know the Current Assets

Current assets are known to have a life span of one year or less, meaning they can be converted easily into cash.

Know the Non-Current Assets

Non-current assets are defined as the assets which are not turned into cash just as easily; this often means that these assets are generally expected to be turned into cash value within a year.

Learn the Different Liabilities

On the flip side of the balance sheet, there are liabilities. These are generally financial obligations which a company owes to outside parties.

Learn about Shareholders’ Equity

Shareholders equity is the amount of money generally invested into a business.

Analyze with Ratios

Financial ratio analysis use formulas to help you gain insight into the company and its operations.

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