Why you should pay close attention to the balance sheet

Julie Brownlee, Fsp Invest, 13 Nov. 2015

Tags: balance sheet, what is a balance sheet, how to use a balance sheet, investing, investing in shares,

When you’re looking for shares to buy, it definitely pays to do your research. Your research should involve looking at potential companies’ financial statements.

One very important part of these statements is the balance sheet.

So what exactly is the balance sheet? And what can you learn from it?

Let’s take a closer look…

What is the balance sheet?

The balance sheet shows you the condition of a company’s financial situation at a specific point in time. In other words, it’s a snap shot of its finances.

The balance sheet includes assets, liabilities and shareholders’ equity.

The first part of the balance sheet shows you the productive assets a company has. The second part shows you its financial methods. This includes liabilities and shareholders’ equity.

These two parts have to balance, hence the name balance sheet.

A balance sheet basically shows you how a company uses its funding for its assets.

It follows the simple formula: Assets = owner’s equity + liabilities.

What you can learn from the balance sheet

The balance sheet is the basis of many ratios you can calculate to analyse the health of the business.

For instance:

  • Net asset value;
  • Debt to equity ratio; and
  • Book value.

What makes these ratios useful is you can use them to compare the standing of one company against another one.

This can be useful to help you decide between two or more companies you want to invest in. You want to invest in a company that gives your money the best chance of growing over the long-term.

And this is why you can’t ignore the vital data included in this part of a company’s accounts.

So there you have it. Why you should pay close attention to the balance sheet.

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