DREIESKIVA​|Roald Kvam

A balance sheet is one of the most important financial statements used to evaluate a company’s health. It offers a snapshot of what a company owns (assets) and owes (liabilities), along with the owners’ equity (shareholders’ equity) at a specific point in time. Understanding how to read and interpret a balance sheet is essential for investors, business owners, and analysts alike.

What is a Balance Sheet?

Think of the balance sheet as a company’s “net worth” statement. It follows a simple equation:

Assets = Liabilities + Shareholders’ Equity

This formula ensures that every dollar a company has either came from borrowing (liabilities) or from its owners (equity).

---

The three main components of a Balance Sheet

1. Assets – What the company owns

Assets are divided into two main categories:

• Current Assets: These are assets expected to be used or converted to cash within one year. Examples include:
  • Cash & cash equivalents
  • Marketable securities
  • Accounts receivable
  • Inventory
• Long-Term Assets: These are assets expected to last more than a year. Examples include:
  • Property, plant, and equipment (PPE)
  • Intangible assets (like patents and trademarks)
  • Goodwill

Assets are ranked from most liquid (easily converted to cash) to least liquid.

2. Liabilities – What the company owes

Liabilities are also divided into two categories:

• Current Liabilities: Obligations due within one year (e.g., accounts payable, short-term debt).
• Long-Term Liabilities: Obligations due in more than a year (e.g., long-term loans, bonds payable).

3. Shareholders’ Equity – What’s left for the owners

This represents the residual value after liabilities are deducted from assets. It’s essentially the owners’ claim on the business and includes items like:

• Common stock
• Retained earnings
• Treasury stock (stock the company has repurchased)

Shareholders’ Equity = Assets – Liabilities

---

How to analyze a Balance Sheet

Use these eight key questions as a framework:

1. How much cash does the company have?
2. Are there any accounts receivable and how reliable are they?
3. Is there any goodwill? How much?
4. What are the biggest liabilities?
5. Does the company carry debt? What kind?
6. Are there any preferred stock issues?
7. Are retained earnings positive?
8. Is there any treasury stock?

These questions help uncover strengths, risks, and potential red flags.

---

Watch out for these yellow flags

Analyzing a balance sheet isn’t just about what’s there — it’s also about identifying potential problems:

1. Cash & Cash Equivalents < Total Debt – Could signal liquidity issues.
2. Accounts Receivable > Revenue Growth – May indicate collection problems.
3. Inventory rising faster than Sales – Could mean demand is dropping.
4. Goodwill too high – Risky if overvalued or not justified by acquisitions.
5. Intangible Assets > 10% of Total Assets – Might skew real asset strength.
6. Short- & Long-Term Debt > Cash – May point to over-leverage.
7. Preferred Stock Present – Less favorable than common stock in bankruptcy.
8. Negative retained earnings – Signals net losses or over-distribution of dividends.

---

A well-prepared balance sheet is more than just a compliance document—it’s a powerful tool that tells the story of a company’s financial position. By focusing on liquidity, solvency, and structure, you can make smarter business and investment decisions.

Whether you’re an investor, a business owner, or just financially curious, learning to analyze a balance sheet is a critical step toward deeper financial literacy.