What a balance sheet shows
A balance sheet is a snapshot of a company at a point in time. It follows one rule: Assets = Liabilities + Equity. Assets are what the company owns, liabilities what it owes, and equity the owners’ residual stake.
Assets and liabilities
Assets include cash, inventory, receivables and fixed assets like plants. Liabilities include loans, payables and other obligations, split into short-term (due within a year) and long-term. Comparing the two shows how the business is funded.
Key things to check
A few numbers reveal a lot about financial health.
- Debt-to-equity — how much the company relies on borrowing; lower is generally safer.
- Book value — net worth per share, compared to the price via the P/B ratio.
- Current ratio — current assets ÷ current liabilities; above 1 suggests it can meet short-term dues.
- Goodwill and intangibles — large amounts warrant a closer look.
Use it alongside other statements
The balance sheet is one of three statements. Read it with the profit & loss (earnings) and the cash flow statement — a company can show profits yet have weak cash flow or heavy debt. Together they give the full picture for fundamental analysis.
Frequently asked questions
What is the basic balance sheet equation?
Assets = Liabilities + Shareholders’ Equity. It always balances — every asset is funded either by debt (liabilities) or by owners’ capital (equity).
What debt-to-equity ratio is healthy?
It varies by industry, but a lower ratio generally means less financial risk. Capital-heavy sectors naturally carry more debt than, say, IT services.
Is the balance sheet enough to analyse a stock?
No. Read it with the profit & loss statement and the cash flow statement — a company can be profitable on paper yet have weak cash flow or high debt.
What is book value?
Book value is a company’s net worth (assets minus liabilities). Per share, it’s compared to the market price using the price-to-book (P/B) ratio.