The One Equation
Every balance sheet follows one equation:
Assets = Liabilities + Shareholders' Equity
That's it. Everything on a balance sheet is one of these three things.
Assets: What the Company Owns
Assets are listed from most liquid (easiest to convert to cash) to least liquid:
- **Cash and cash equivalents:** Actual cash. The most important number.
- **Short-term investments:** Treasury bills, money market funds
- **Accounts receivable:** Money customers owe the company
- **Inventory:** Products waiting to be sold
- **Property, plant & equipment:** Factories, offices, servers
- **Intangible assets:** Patents, trademarks, goodwill from acquisitions
What to look for: Is cash increasing or decreasing over time? A company burning through cash is a warning sign.
Liabilities: What the Company Owes
- **Accounts payable:** Money the company owes suppliers
- **Short-term debt:** Loans due within a year
- **Long-term debt:** Bonds and loans due in more than a year
- **Deferred revenue:** Money received for services not yet delivered
What to look for: The debt-to-equity ratio. Above 2.0 is generally considered high leverage. Below 0.5 is conservative.
Shareholders' Equity: What's Left for Owners
Equity = Assets minus Liabilities. This is what would theoretically be left if the company sold everything and paid all debts.
- **Retained earnings:** Profits reinvested into the business (not paid as dividends)
- **Common stock:** The par value of shares issued
What to look for: Is equity growing? Shrinking equity means the company is either taking on debt, losing money, or buying back stock aggressively.
The 5-Minute Balance Sheet Check
When evaluating a stock, check these five things:
- **Cash position:** Can it survive a downturn?
- **Debt level:** Is debt manageable relative to earnings?
- **Current ratio:** Current assets / current liabilities. Above 1.5 is healthy.
- **Equity trend:** Is shareholder equity growing?
- **Goodwill:** Is a large chunk of assets intangible? (Risky — goodwill can be written down)
For informational purposes only — not financial advice.