The Balance Sheet is a financial statement indicating the strength of the company at a specific point in time.  Most companies will report their Balance Sheet numbers quarterly with a year over year summary at the end of their fiscal year.  Put quite simply, the Balance Sheet seeks to “balance” two factors.  1)  That which is owned by the company and reflected by its’ assets and 2) that which is not owned comprising both borrowed money (debt and liabilities) and money generated through the equity of shareholders.  The Balance Sheet equation is:  Assets = Liabilities + Shareholders’ Equity.

Line items that appear under assets on the Balance Sheet can include the following:  Current Assets including cash and cash equivalents, Accounts Receivable, Short Term Investments and Inventory.  Current Assets fund the day to day operations of the company.  If the company is deficient in this area, it will force them to acquire more debt or initiate a capital raise with additional equity.  Long Term Assets include Fixed Assets such as buildings and equipment.  It also includes Intangible Assets such as intellectual property and blue sky value like good will.

Liabilities include Current Liabilities, Long Term Liabilities.  Current Liabilities include such items as Short Term Debt, Accounts Payable, Accrued Expenses and that portion of Long Term Debt that is currently due.  Long Term Liabilities comprise items such as mortgages and business loans.

The final part of the equation is Shareholder’s Equity and that is the part of the company that is attributed to claims that the stockholders have on the value of the company.  This value is typically arrived at by subtracting Total Liabilities from Total Assets resulting in the Shareholder’s Equity. 

So, as investors, what are we looking for on the Balance Sheet to tell us that the company is worth investing in?  An appealing investment would be a company with a large cash position that has been created from business operations, not from the sale of bonds or equity shares and little to no debt.  We look for a steady rise in inventory to satisfy the demand for the company’s products.  Net receivables should be low because that represents the company’s ability to bring cash in the door quickly and efficiently.  Next week we will talk about the Cash Flow Statement.

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