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.

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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

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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...

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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 ...

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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 ...

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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 head...

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