Learn more about problemsolving with this collection
The importance of innovation
The power of perseverance
How to think big and take risks
Why Balance Sheets Are Important to Analysis
A company's balance sheet provides a tremendous amount of insight into its solvency and business dealings. A balance sheet consists of three primary sections: assets, liabilities, and equity.
Depending on what an analyst or investor is trying to glean, different parts of a balance sheet will provide a different insight. That being said, some of the most important areas to pay attention to are cash, accounts receivables, marketable securities, and short-term and long-term debt obligations.
11
113 reads
The Three Categories
Many experts consider the top line, or cash, the most important item on a company's balance sheet. Other critical items include accounts receivable, short-term investments, property, plant, and equipment, and major liability items.
The big three categories on any balance sheet are assets, liabilities, and equity.
11
110 reads
Important Assets
All assets should be divided into current and noncurrent assets. An asset is considered current if it can reasonably be converted into cash within one year. Cash, inventories, and net receivables are all important current assets because they offer flexibility and solvency.
Cash is the headliner. Companies that generate a lot of cash are often doing a good job satisfying customers and getting paid. While too much cash can be worrisome, too little can raise a lot of red flags.
10
80 reads
Important Liabilities
Like assets, liabilities are either current or noncurrent. Current liabilities are obligations due within a year.
Fundamental investors look for companies with fewer liabilities than assets, particularly when compared against cash flow. Companies that owe more money than they bring in are usually in trouble.
10
51 reads
Kinds Of Liabilities
Common liabilities include accounts payable, deferred income, long-term debt, and customer deposits if the business is large enough.
Although assets are usually tangible and immediate, liabilities are usually considered equally as important, as debts and other types of liabilities must be settled before booking a profit.
10
42 reads
Important Equity
Equity is equal to assets minus liabilities, and it represents how much the company's shareholders actually have a claim to. Investors should pay particular attention to retained earnings and paid-in capital under the equity section.
Paid-in capital represents the initial investment amount paid by shareholders for their ownership interest. Compare this to additional paid-in capital to show the equity premium investors paid above par value. Equity considerations are among the top concerns when institutional investors and private funding groups consider a business purchase or merger.
10
41 reads
IDEAS CURATED BY
"A good plan violently executed now is better than a perfect plan executed next week." - Patton
Other curated ideas on this topic:
Read & Learn
20x Faster
without
deepstash
with
deepstash
with
deepstash
Personalized microlearning
â
100+ Learning Journeys
â
Access to 200,000+ ideas
â
Access to the mobile app
â
Unlimited idea saving
â
â
Unlimited history
â
â
Unlimited listening to ideas
â
â
Downloading & offline access
â
â
Supercharge your mind with one idea per day
Enter your email and spend 1 minute every day to learn something new.
I agree to receive email updates