Track 02 · Reading Financial Statements
The balance sheet: what a company owns and owes
Assets, liabilities and equity, and how to tell a fortress balance sheet from a fragile one.
Everything the company holds is financed either by borrowing or by the owners’ money — which is why the two totals must match.
Illustrative proportions: the identity assets = liabilities + equity is what makes the statement checkable.
Assets = liabilities + equity
Unlike the income statement, the balance sheet is a snapshot at a single date. Everything the company owns (assets) is financed either by borrowing (liabilities) or by the owners’ money (shareholders’ equity).
That identity always holds, which is what makes the statement checkable: if the numbers do not balance, something is being classified in a way you should understand before trusting the ratio.
Cash and debt, side by side
Cash and short-term investments are the most liquid assets; inventory and receivables take time to turn into cash. On the other side, debt due within a year is more dangerous than debt due in five.
Comparing cash on hand with total debt gives you net cash or net debt: the single fastest read on whether a company could survive a bad year without issuing shares.
Book value and the P/B ratio
Equity is the accounting value of the owners’ stake: book value. Divide the share price by book value per share and you get price-to-book.
Below 1.0 means the market prices the company under the accounting value of its assets. That is interesting for asset-heavy businesses, but often a signal the market expects losses ahead.
Red flags worth a second look
Rising debt with flat or falling operating income, inventory growing much faster than revenue, and receivables ballooning all point to the same risk: profit that is hard to convert into cash.
No single line condemns a company; the pattern across several quarters is what matters.
- Debt/Equity climbing while margins fall
- Inventory growth far above sales growth
- Frequent equity issuance to fund losses
- Liabilities due within a year exceeding cash on hand
Three things to remember
- 01Everything a company owns is financed by debt or by equity.
- 02Net cash (cash minus debt) is the fastest liquidity read.
- 03P/B below 1.0 is a question to investigate. It is not automatically a bargain.
Try it on live data
Tools on this site are for research and education. Nothing here is financial advice or a recommendation to buy or sell.