Balance sheet knowledge !!!

Discussion in 'Articles & Tutorials' started by Shivam, May 30, 2013.

  1. Shivam

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    May 29, 2013
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    A Balance Sheet is one of the financial reports that is provided to the stakeholders of a business to help them quantify the financial strength of a company. Note: The Balance Sheet is a snap-shot of the financial status of a company at a particular point in time.
    The total amount of the Owners Equity (also known as the Net Worth of the company) is the amount of money that would be left over if all the Assets were sold and the external funders (Liabilities) were paid out. This is the first and obvious read of a Balance Sheet in relation to the company's financial strength. i.e. it quantifies how much the business is worth from an accounting point of view. Note: an accounting point of view does not take into account future profit potential and values assets at the time of purchase not what they might be worth today. Owners Equity is typically made up of the shareholders/owners initial and subsequent investments (Capital), the past profits that have not yet been distributed to the shareholders/owners (Retained Earnings) and the profits from the current trading period (Current Earnings).
    Reading a Balance Sheet using Financial Ratios
    Reading about the financial strength of a business from a balance sheet generally requires a certain amount of analysis and comparison, as well as access to the other financial report, the Income Statement.
    This analysis is called the Financial Ratio and Trend analysis. By comparing this period's calculated ratios with prior periods and industry benchmarks, allows you to identify healthy/unhealthy trends in the financial strength of the company in relation to its past and the industry in general i.e. whether the returns from the business are competitive with other investment options, whether the company is becoming more or less profitable, more or less dependent on external funders, better or less able to meet its financial obligations when they become due or more or less efficient at managing the assets of the company.There are many different types of financial ratios but they are generally grouped into:Leverage Ratios - which calculate the extent to which the company uses external debt in its capital structure rather than equity funders. Over reliance on external debt makes a company's profitability vulnerable to interest rate raises and is more vulnerable to liquidation actions by creditors during a downturn. The most common leverage ratio is the debt to equity ratio.

    Typical Balance Sheet:
    View attachment 1667

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