Overview
The balance sheet summarizes the financial condition of a company; in fact, it is sometimes called the “statement of financial position.” A detailed tour of the balance sheet is in Chapter 2 of the online text. The most important information in the balance sheet relates to the assets and liabilities of the company. The difference between the assets and liabilities is called the shareholders equity; it is what shareholders would receive if the assets were sold and the liabilities paid off. A sub-category is “current assets” and “current liabilities.” Current assets are those that can easily be converted into cash; current liabilities are those due within a year. The difference between these is a measure of the short term solvency of the company.
Evaluating the strength of a company with balance sheet information
You can see how strong a company’s balance sheet is in two ways: by looking at changes in the balance sheet over time, and by comparing the company to others (e.g. to its competitors). Let’s look at an actual company, 1 800 FLOWERS.COM:
And
The balance sheet summarizes the financial condition of a company; in fact, it is sometimes called the “statement of financial position.” A detailed tour of the balance sheet is in Chapter 2 of the online text. The most important information in the balance sheet relates to the assets and liabilities of the company. The difference between the assets and liabilities is called the shareholders equity; it is what shareholders would receive if the assets were sold and the liabilities paid off. A sub-category is “current assets” and “current liabilities.” Current assets are those that can easily be converted into cash; current liabilities are those due within a year. The difference between these is a measure of the short term solvency of the company.
Evaluating the strength of a company with balance sheet information
You can see how strong a company’s balance sheet is in two ways: by looking at changes in the balance sheet over time, and by comparing the company to others (e.g. to its competitors). Let’s look at an actual company, 1 800 FLOWERS.COM:
When you bring up the balance sheet, the first five fields are
plotted in the chart. Since the company
has reported data at two time periods (Jan 2012 and July 2011), you can see the
changes visually: cash, receivables, and inventories have all risen in the six months
between the two reporting periods.
One way to interpret whether the balance sheet has become stronger
or weaker is to look at relative changes.
For example, take the fields that make up current assets. How have these changed over the six
months? An easy way to see this is to
plot these fields and then click the Pie Chart button. The two resulting charts are:
And
The pie chart makes it easy to spot the change in the composition:
you can see that the single biggest change is the increase in inventories (in
green) and the second is the increase in receivables (in red).
Similarly, we can consider Liabilities. How have the obligations the company face
changed over time? Two relevant charts
are:
And
The above charts immediately reveal that the company has reduced
their debt obligations (both current and non-current) but increased their short
term liability Accounts Payable. That is
they have shifted their obligations from the financing decisions to their
operating decisions along with the net effect being that Total Liabilities increased.
Relative changes such as this let you evaluate the strength of the
company: while assets have risen over the six months, the primary drivers have
been inventories and receivables. While
liabilities have increased the primary drivers have been the shift from
financing to operating decisions. What
does this mean? To evaluate this
properly, you need to look at other parts of the statements: what has happened
to sales? What has happened to the cost
of generating these sales? What has happened to the “cash flows from operations”? We will come to these in subsequent lessons.
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