One of the biggest mistake investors make is choosing business with weak balance sheet....
But now no more....
Welcome to the world of Balance Sheet
Let's learn all about different components of Balance Sheet....
Ready for the ride? Letβs get started!...
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But now no more....
Welcome to the world of Balance Sheet
Let's learn all about different components of Balance Sheet....
Ready for the ride? Letβs get started!...
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Have you ever wondered how money works its way into a business?
Let's explore the simple yet interesting journey of cash and numbers.
It's like peeking into the financial diary of a company
Let's first understand different components..
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Let's explore the simple yet interesting journey of cash and numbers.
It's like peeking into the financial diary of a company
Let's first understand different components..
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Balance Sheet serves as a snapshot, showcasing a company's financial position at a specific point in time
It has 3 main parts:
1. Assets
2. Equity
3. Liabilities
Think of it as a financial health report, with the fundamental equation
Assets = Equity + Liabilities
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It has 3 main parts:
1. Assets
2. Equity
3. Liabilities
Think of it as a financial health report, with the fundamental equation
Assets = Equity + Liabilities
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Assets
Assets represent what a company owns, divided into two types:
1. Current Assets (short-term)
2. Non-current Assets (long-term)
Let's dig deeper here...
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Assets represent what a company owns, divided into two types:
1. Current Assets (short-term)
2. Non-current Assets (long-term)
Let's dig deeper here...
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Current Assets:
These are assets easily converted to cash within a year, including short-term deposits, marketable securities, and stock.
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These are assets easily converted to cash within a year, including short-term deposits, marketable securities, and stock.
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The first item is Inventories, comprising finished goods, raw materials, and work in progress.
Another crucial item is trade receivables, reflecting credit sales after adjusting for doubtful accounts.
We should monitor inventory & debtor days by comparing with other
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Another crucial item is trade receivables, reflecting credit sales after adjusting for doubtful accounts.
We should monitor inventory & debtor days by comparing with other
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Industry players to check whether the inventory and receivable days are in line.
Cash & cash equivalents include cash in hand, bank balances, & deposits maturing in less than 3 months.
High balance in current account or cash for a long period of time might be suspicious
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Cash & cash equivalents include cash in hand, bank balances, & deposits maturing in less than 3 months.
High balance in current account or cash for a long period of time might be suspicious
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Non-current Assets
These assets, not easily convertible to cash, include buildings and machinery
The first line item of Non-current assets is Property, Plant & Equipment, PP&E captures the companyβs tangible fixed assets.
Tangible assets are those which can be seen and felt.
These assets, not easily convertible to cash, include buildings and machinery
The first line item of Non-current assets is Property, Plant & Equipment, PP&E captures the companyβs tangible fixed assets.
Tangible assets are those which can be seen and felt.
The next line item is
Capital Work in Progress: Those assets which are in the construction phase or are being built are termed as CWIP.
These assets will move to PP&E once construction is completed.
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Capital Work in Progress: Those assets which are in the construction phase or are being built are termed as CWIP.
These assets will move to PP&E once construction is completed.
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High CWIP as a % of PPE can be used as a screening filter to find companies going through an expansion phase
Intangible Assets - This line item includes all of the companyβs intangible fixed assets, which may or may not be identifiable.
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Intangible Assets - This line item includes all of the companyβs intangible fixed assets, which may or may not be identifiable.
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Intangible assets include patents, licenses, brand, software and goodwill.
Be cautious if these make up a high percentage of total assets, as their value is often based on assumptions.
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Be cautious if these make up a high percentage of total assets, as their value is often based on assumptions.
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Equity:
Includes Equity Share Capital and Other Equity,
Equity Share Capital
This part of equity represents the actual investment made by shareholders
No. of shares multiplied by face value
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Includes Equity Share Capital and Other Equity,
Equity Share Capital
This part of equity represents the actual investment made by shareholders
No. of shares multiplied by face value
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This gives you the total amount of money that shareholders have directly put into the business.
Retained Earnings: This is a sum of all the profits the company has made since its inception, minus any losses.
It's like a savings account for the company's success over time.
Retained Earnings: This is a sum of all the profits the company has made since its inception, minus any losses.
It's like a savings account for the company's success over time.
So, equity is a combination of the initial investment by shareholders and the financial health the company has built up over its lifetime.
It's a measure of both trust from investors and the company's ability to weather unexpected challenges.
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It's a measure of both trust from investors and the company's ability to weather unexpected challenges.
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Liabilities
Liabilities represent the company's financial obligations, divided into Non-current and Current Liabilities
Non-current Liabilities
These are the financial obligations that extend beyond the next 12 months.
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Liabilities represent the company's financial obligations, divided into Non-current and Current Liabilities
Non-current Liabilities
These are the financial obligations that extend beyond the next 12 months.
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Long-term Borrowing: This category includes loans and financial obligations that have a payment timeline extending beyond the next 12 months.
There are two types:
Secured: These loans are backed by assets, providing a safety net for the lender.
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There are two types:
Secured: These loans are backed by assets, providing a safety net for the lender.
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Unsecured: Contrarily, unsecured loans don't require collateral and are often sourced from related parties like company directors.
Provisions: Companies set aside funds as provisions for anticipated future obligations.
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Provisions: Companies set aside funds as provisions for anticipated future obligations.
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Provisions are further divided into current and non-current, depending on the timing of the expected obligation.
Deferred Tax Liabilities/Assets: Due to differences in accounting standards (Companies Act) and tax regulations (Income Tax Act), companies may have this..
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Deferred Tax Liabilities/Assets: Due to differences in accounting standards (Companies Act) and tax regulations (Income Tax Act), companies may have this..
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Current Liabilities:
Trade Payables: These represent amounts owed by the company to its suppliers.
For instance, if the company acquires raw materials on credit, this outstanding amount is reflected as trade payables.
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Trade Payables: These represent amounts owed by the company to its suppliers.
For instance, if the company acquires raw materials on credit, this outstanding amount is reflected as trade payables.
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In essence, liabilities on the Balance Sheet encapsulate the promises and financial commitments the company must fulfill
Whether it's repaying long-term loans, planning for future expenses, or settling immediate bills with suppliers, understanding liabilities is crucial
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Whether it's repaying long-term loans, planning for future expenses, or settling immediate bills with suppliers, understanding liabilities is crucial
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When engaging in balance sheet analysis, it's crucial to compare the various balance sheet ratios with those of industry peers.
This comparison gives an idea about the underlying eficiency of the business.
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This comparison gives an idea about the underlying eficiency of the business.
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Lastly
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That's a wrap!
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