The balance sheet of a company is what tells about its business in terms of money. It reveals the company?s assets, liabilities and equity. The basic principle behind a balance sheet is that company?s assets are equal to liabilities plus shareholders? equity.
The company?s assets or the means to run the company is equal to the obligations to be paid by the company, equity and retained earnings. The tangible assets can be calculated in terms of money while intangible assets cannot be. Tangible assets are machines, buildings, land and other physical things. While non-tangible assets are the good will of the company, copyright or patents and brand name.
Long term liabilities and short term liabilities will change the financial statement. Long term liabilities enter as debts + interest for that year, while the short term liabilities enter as total debt payable for a period. Equity is the initial money invested in the business.
The most important thing to look for in the balance sheet is the debt to equity ratio. If debt is more than equity it means that if the company does well then the shareholder gets rewarded well and otherwise vice versa. It is like risk vs. return trade-off. So, one needs make sure that the company is doing well in clearing its long term debts over a period of time. It means the debts and interests it pays from year to year are decreasing. Otherwise it is a bad sign. If the company has lesser debts compared to equity then it is a balanced company. The returns can be less but it will be stable.
