How to Read and Interpret Balance Sheet

Investors look at balance sheet to evaluate what the company owns and owes
before make a decision on stock investment or stock pick.
A company's balance sheet is a snapshot of its financial condition on a given day, usually
at the end of its fiscal year or end of quarter, unlike income statement and cash flow
statement which applies over certain period of time. The balance sheet tell investors on
what assets the company owns, what liabilities the company owes, and the value of the
business to the company owner or common stock holders. In balance sheet, total Assets
must always equal the sum of liabilities and Stockholder's equity. This lead to the integrity
of balance sheet as shown below:
Total Asset = Total Liability + Shareholder's Equity
The balance sheet has two parts: assets on the left-hand side or at the top and liabilities on
the right-hand side or at the bottom as shown in the following picture and table listed
below.

 
Balance Sheet
Balance sheet tells investor what are the company assets and Liabilities.
The assets section of the balance sheet lists the most liquid, or "current" such as cash first
to the least liquid (plant and equipment) at the bottom. The liabilities section of the balance
sheet lists liabilities in order of their immediacy (how soon the debts must be paid).
The balance sheet is an important tool for analyzing the financial health of a company.
Using only a firm's balance sheet, investors can compare current assets and current
liabilities to evaluate the degree to which a company can meet short-term payment
obligations; please refer to financial ratio analysis for details.
Balance
Sheet
 Example of DELL Balance Sheet from Annual Report (10-K

Year 1998, 1999

DELL 10-K DELL 10-K
Balance Sheet type
1998 1999
Current Assets formula $3,912 $6,339
    Cash And Cash Equivalents key-in $320 $520
    Short Term Investments key-in $1,524 $2,661
    Account Receivables key-in $1,486 $2,094
    Inventories key-in $2330 $273
    Deferred income taxes key-in $0 $0
    Prepaid and other Current Assets key-in $349 $791
Long Term Assets formula $356 $538
    Long Term Investments key-in $0 $0
    Property Plant And Equipment - Net(less
key-in $342 $523
accumulated depreciation)
    Goodwill / Development Expenditure key-in $0 $0
    Intangible Assets (pattent, license righs etc..) key-in $0 $0
    Accumulated Depreciation and amortization key-in $0 $0
    Other Assets key-in $14 $15
    Deferred Long Term Asset Charges key-in $0 $0
Total Assets formula $4,2680 $6,877
Current Liabilities formula $2,697 $3,695
    Accounts Payable (part of NIBCL=Non Interest
key-in $1,643 $2,397
Bearing Current Liability)
    Accrued liabilities (compensation/Salaries/etc..
key-in $1,054 $1,298
part of NIBCL)
    Accrued Income tax  key-in $0 $0
    Deferred business acquisition payment /
key-in $0 $0
Deferred revenue
    Short-term debt key-in $0 $0
    Short Term And Current Long Term Debt key-in $0 $0
    Other Current Liabilities key-in $0 $0
Long Term Liabilities formula $278 $861
    Long Term Debt key-in $17 $512
    Deferred Long Term Liability Charges key-in $261 $349
    Deferred Income Taxes   key-in $0 $0
    Minority Interest key-in $0 $0
    Negative Goodwill key-in $0 $0
    Other long-term Liabilities key-in $0 $0
Total Liabilities formula $2,975 $4,556
Stockholder Equity formula $1,2930 $2,321
    Preferred Stock key-in $0 $0
    Common Stock key-in $747 $1,781
    Class B Common Stock key-in $0 $0
    Treasury Stock key-in $0 $0
    Misc Stocks Options Warrants / Additional Pay-in
key-in $0 $0
 Capital/Share Premium
    Capital Surplus/Deferred compensation/Reserve key-in $0 $0
    Redeemable Preferred Stock / Note receivable from
key-in $0 $0
 shareholder
    Other Stockholder Equity / Accumulated other
key-in ($61) ($66)
 comprehensive income (loss)
    Accumulated deficit/Retained Earnings key-in $607 $606
 Source: www.1st-Stock-Investment.com 
 
Current Assets
Current assets are liquid assets normally would be able to converted to cash within one
year.
Cash is the most liquid current asset. Other than case, checks, draft and bank accounts
without restrictions also considered as cash due to the ease of conversion into currency.
Cash equivalents are highly liquid assets such as money market funds, U.S. Government
securities etc....
Accounts receivable is the money customers owe to the company due to the credit
purchase instead of cash purchase. Normally this is one of the significant component of the
balance sheet.
Inventory is the material used to produce the finish good during the manufacturing
process before they are sold. There are three type of inventory namely raw materials,
works-in-progress, and finished goods.
 
Long-Term Assets
Fixed assets refer to tangible assets such as building, plants, property, equipment with a
useful life greater than one year.
Depreciation is a process of distributing the purchase price of a fixed asset over certain
period of it useful life and appears in balance sheet to deduction from the original fixed
assets valude.
Intangible assets (= Goodwill on Consolidation + Expenditure Carried Forward + Mining
Exploration Expenditure Trademarks) Patents, copyrights, franchises are intangible and non-
physical assets where it value is very difficult to estimate. Sometime intangible assets can
consist of a major asset in some company especially those research and development based
companies.

Current Liabilities
Current liabilities are those obligation that a company need to pay off within a year.
Dividends, Taxes, Accounts payable, interest and rental are part of the current liabilities.
Normally current liabilities are paid using current assets.

Long-term Liabilities or Debt

Long-term liabilities are those obligation with pay off period more than a year such as a
loans financing by a company. The installment need to paid off during the particular year is
considered as current liability.

Shareholders' equity or Book value

Shareholder's equity is the net worth of a company, in the other words, it is the remaining
amount of value after all obligations have been paid off. Shareholder's equity normally
consist of the amount of invested capital by the owners plus the net income generates and
reinvested (also known as Retained Earnings) in the company.

Working Capital (=Current Assets - Current Liabilities)

This formula is very similar to the current ratio. The only difference is that it gives you a
dollar amount rather than a ratio. It too is calculated to determine a firm's ability to pay its
short-term obligations. Working Capital can be viewed as somewhat of a security blanket.
The greater the amount of Working Capital, the more security an investor can have that
they will be able to meet their financial obligations.

Total Assets = Current Assets + Long Term Assets