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Analysis of Balance sheet

Which key elements of a balance sheet needs to be considered for making investment in a
company and in stocks?

Good Answers (5)

All elements are key. But surely the first stop is to examine the trends rather than just the
current. Trends in costs, assets, margins, overheads and profit.
It's all relevant.
The balance sheet provides a 'snap shot' for the companies position at a point in time and should always be interpreted against a particular set of circumstances and market
conditions. So it is important to compare the current situation with historic data to
identify trends, and you may also want to compare comany X with competitor Y in the
same sector.
Important things to consider 1) Does the company have sufficent 'cash' to pay it's liabilities?
2) Are the debts > the assetts?
3) Are the amounts owed by clients 'reasonable' for the business?
4) Are the assetts being used to generate sales?
5) Are those sales profitable?
6) How much of the equity in the business belongs to the share holders, compared with
other forms of debt and borrowings.
7) How much capital is required to generate sales, and will more capital be required to
finance future growth
8) Is the company improving performance over time?
In many cases the 'right answer' depends on the circumstances - so you need to cross
reference the data with other similar companies to understand their strengths and
weaknesses.
On the balance sheet look at:
1. ratio of debt/equity
2.ratio of short term to long term debt
3. the amount of cash and equivalents
4.on a public company the Book value of the shares ( equity/shares outstanding)
5. How are the assets held? Is the real estate fully depreciated or what %?

What you do with this info is determined by how you invest.

A value investor wants a low book value in realtion to share price., low debt to equity
ratio.
A growth investor will want little or no Real esatte on the balance sheet, more leverage,
very little cash that is not being used.
There are many other ways of looking at this--it just depends on your investment style
The balance sheet itself is not sufficient to make a judgement. Briefly, the following is a
must-see list.
In the P&L you need to see historical growth in
1. Sales,
2. Cost of sales,
3. Expenses
4. Profits
In the balance sheet you need to see several things:
1. Quick ratio
2. Current ratio
3. Existence of Intangible assets and their basis of amortisation
4. Written down value of fixed assets
5. Existence of Long-term debts - their repayment terms and ease of payment through
cash generated from profits
6. Ratio of debt to equity
In the cash flow you should see
1. Funds generated from operations
2. Liquid health of the company in meeting its liabilities and growth requirements from
the above funds.
3. Surplus left for distribution to shareholders.
I agree with Chris Warrander that the trend is important to examine.
The top three topics I would recommend you to examine is:
1.
The debt/equity ratio - You dont want to invest in a company which will go bankrupt
only weeks after your investment.
2.
How liquid are the assets? If the company is a research and development company it
migth have valuable assets, but if the assets will only generate income after 10 years, you

should consider from where the company will get additional funds
3.
The income and the earnings potential.

More Answers (4)

I agree with Akhtar, You really should be looking at all of the finacial statements in order
to make an informed decision
Without looking at trends on the statement of cash flows, the balance sheet won't tell you
more than a snapshot point in time. In the longterm, the ability to generate operating cash
to cover all other needs is the most important.
You must understand your market and customer needs in a comprehensive analysis of
sales forecasting. Then it's all cash flow statement trends and forecasts. Then balance
sheet analysis can be meaningful.
First place to start is - look at the executive team's background. They are the ones that can
make or break the company
Funadamental analysis is important, but I always keep in mind that those "Hard" numbers
were generated by how "soft" people decide to prepare them.