What is a Balance Sheet and How Can I Use It for Investing?
A balance sheet is a financial statement that provides information about the company's assets and liabilities and the shareholder's equity. There is a specific formula that all sheets follow. Basically, the assets of a company equal the liabilities plus the equity of the shareholders. The point of a balance sheet is to ensure that both of the sides balance out to be equal. The company will have to pay for their assets by using loans or shareholders' equity.
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What is a Balance Sheet?[/caption]Let's take a closer look at the three main components that make up the sheet.
Company Assets
A company's assets are basically the items that the company owns that are valuable, and in most cases they were paid for by the company or donated to them. There are many different asset types. These include cash assets, receivables, property, and many others.
Company Liabilities
A company's liabilities include the items that the company must pay out to other people, including other businesses, individuals, or government agencies. There are many different liability types. These include current liabilities, short term liabilities, long term liabilities, and many others.
Stockholders' Equity
A company's stockholder equity is basically the amount of money that investors have put into the company. Some of this will also include profits that the company has kept to use for new projects that are business related.
Sheets are used to reconcile accounts. Assets should always be equal to the amount of liabilities and equity. Therefore, the equation is A = L + E, or Assets = Liabilities + Equity. It is fairly simple to understand.
A balance sheet can also be used to see where a business stands financially. Investors should always be aware of the businesses that they entrust their investments with. A good way to ensure that you are making wise investment choices is to take a look at the sheet to ensure that they even out. Shareholders will definitely want to know where they stand on these financial documents.
Another group of people that commonly view these finances are potential creditors. Creditors that help out businesses will want to know that a business is able to check and balance their assets and liabilities. This helps to show them that they are making wise loans to the business.
Analyzing a balance sheet may not be as easy as it sounds. The best way to analyze these sheets is through the use of ratio analysis. There are three different ratios to consider. These include class liquidity ratios, solvency ratios, and profitability ratios. Each of these ratios shows a particular business aspect.
If you really want to improve your business and investment moves, then you will want to make sure that you focus on learning the in's and out's of the balance sheet and how they can affect you. Don't glance blindly at a balance sheet without understanding how to properly analyze it. This can be very detrimental, especially for people who are new to investing.
If you would like to learn more about what a balance sheet is, be sure to click on this link because it provides a great video lesson on the subject.
Also, if you would like to learn investing like Warren Buffett, this link takes you to an in-depth site that teaches his investing approach through 10 hours of YouTube videos.
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