Understanding A Balance Sheet
Keywords: balance sheet
There are three main sources of financial information that a company regularly makes available to investors. These 3 items are the balance sheet, the income statement, and the cash flow analysis. Most neophyte investors have no idea how to interpret these statements. A lot of stockbrokers are not too proficient at it either. You do not need to be an expert or a financial analyst to understand and evaluate financial information, but you should know what to look for so you can determine whether you should invest in a certain company. For our purposes here, we are going to discuss how to analyze a balance sheet, which is generally considered to be the most important tool for analyzing the financial health of a company.
The first thing to examine on the balance sheet are the assets. Assets are things that the business owns or will own in the future and have a value attached to them. The next important item is liabilities, which includes everything that a company owes, such as taxes, wages, loans to be repaid, etc. The other most important item to look at is equity, which is the earnings and money contributed by shareholders. You can calculate the shareholder equity by subtracting total liabilities from the total assets.
If Shareholder Equity is a very small number or a negative number, this does not bode well for investors. If the number is on the high side, that means that the company is profitable and able to share its earnings with stockholders by paying a dividend.
A balance sheet is normally presented in two different formats, depending on where it is published. Sometimes the statement is presented horizontally. Other times, it is presented vertically. The vertical presentation is used most often because it is easier to analyze. The five basic components of a balance sheet are:
Shareholder Equity (we already covered this)
Non-current liabilities (money to be paid more than 12 months from now)
Current liabilities (money to be paid within the next 12 months)
Non-current assets (non-cash items of a permanent nature)
Current assets (cash or items that will become cash within the next 12 months)
These components are categorized differently depending upon the industry the company inhabits. A telecommunications company would have different categories of assets and liabilities than a pharmaceutical company. Also, it is important to note, balance sheets for companies in a certain industry will show different levels of profitability. Just because a software company does not have the same level of shareholder equity as a retail business does not mean that the software company is not a good investment. The software business might have to meet a lot of short-term liabilities, such as paying programmers and investing in technology, in order to meet future sales goals. Once the software is finished, those liabilities might disappear, making them profitable. You need to take into account the operations of the company when reading a balance sheet.
Also, it is important to realize that balance sheets, though they always span a 12 month period, the beginning and ending dates can differ from one company to the next. A company will typically select a 12 month period that results in the lowest level of their business cycle being the end of the 12 months. So, some statements might run from December to December, while others might run from April to April.
I hope this information will help you understand a balance sheet.. Try to set aside some time and log on to a stock quoting website. Look up the stocks of companies you are currently invested in, and then click on the link for their balance sheet. Take a few moments to review it, and then call your broker if you have any concerns.
Jim Pretin is the owner of www.forms4free.com, a service that helps programmers make email forms.
Previous Articles Highlighter:
Introduction To Stocks (1)
The earlier you begin, the more money you can potentially make down the road. Carefully research the companies you are going to invest in and you will do fine.
How To Get Real Estate Listings Via Real Estate Marketing Articles (2)
But again, you're building a business and a presence, so don't expect a lot of sales or listings right out of the box. Instead, you should expect little to any immediate success from your initial mailings.
Holiday Insurance - A Necessity Or A Luxury? You Decide (3)
Need more information about holiday insurance - or maybe where to find the best deal for your travel needs? Look no further, there's all you need at Martin Haworth's website, www.BestHolidayInsuranceGuide.com.
Cashback Credit Card For Reward-Loving Individuals (4)
Thus, only the elite class of the society has the power to make "cashless purchases" using this piece of plastic contraption. However, many credit card companies realized that this kind of product can also be useful to moderate-income individuals in terms of financing their expenditures that their cash cannot handle anymore.
The Benefits Of Gathering Relocation Information (5)
No matter if you are planning a large international move, a move across the country, or are just planning on moving across town, collecting and researching relocation information before moving will save you time, money and a lot of stress.
Credit Card Types: Unsecured (6)
This is the amount of interest that the company will charge you if you do not pay off the full balance within the grace period allowed. As you might imagine, the lower the ARP, the less you will have to pay in interest charges.
MyOwn10-Key - How To Balance Your Checking Account Without First Entering All Of Your Transactions (7)
As an aid to help keep track of, and find the oldest, uncleared transaction in your checkbook register, draw a line down the column in which you check off cleared items.
New Exchange Traded Fund Makes Sophisticated Investment Strategies Available To ETF Investors (8)
Traders should understand that this fund is highly speculative. It is intended as more of a long term investment and should not be used for frequent trading due to potential negative tax consequences.
Despite Slowdown California Home Prices Set New Record (9)
During the buying frenzy this was not the case. Homes were not always priced right. Teardowns were being sold at what would be called unreasonable prices now. When the buying frenzy was on, homes were purchased with the feeling they would increase rapidly within months.
Two New Exchange Traded Funds Allow Unique Oil Investment Strategies (10)
Well Claymore has you covered there too. Claymore also operates a fund (DCR) that is designed to provide positive returns to investors when the price of oil is falling.
New Fund For Indian Investors Can Benefit U.S. Investors (11)
Many people are now investing in gold using Exchange Traded Funds as the investment vehicle. On the U.S. Market the two main Gold ETF funds are GLD and GDX.
Exchange Traded Funds Venture Further Into Foreign Currency Markets (12)
Many foreign ETF Stock Funds are not only benefiting from expanding economies but also from currency profits due to the falling dollar. This allows the Fund to grow from two factors.
California Foreclosure Activity Up By The Biggest Margin In 14 Years- Is The Bust Starting? (13)
For the past year the rate of appreciation in southern California was 4.9%. With the slowdown of sales it is becoming clear that home price appreciation is not going to happen for at least the nest two years.
Using ETFs To Invest In A Good Performing Commodity Sector You May Have Missed (14)
While gold and oil related ETFs are currently performing better, their volatility is much greater and next month could be a different story. The Powershares Water Resources Portfolio is based on the Palisades Water Index.
Best Performing Exchange Traded Funds For 2006 Thru August (15)
The fund leading the pack so far this year is iShares Cohen & Steers Realty Majors (ICF). These funds tend to invest is things like shopping centers, office parks and shopping centers.
California Real Estate Market Gives Mixed Messages (16)
In California the market is returning to normal conditions. It will take longer to sell a home and prices may stay flat or increase slowly. So far the signs of market stress that would indicate a bust are not there.
A New Exchange Traded Fund May Have A Major Impact On Long Term Silver Prices (17)
It is one of the new Exchange Traded Funds that is acting more like a commodity then a stock. Exchange Traded Funds which ten years ago were very conservative and were mostly mirrors of major stock indexes, are now getting very creative in the sectors they represent and also in the underlying financial instrument they represent.
Another Way Of Looking At The Gold Price Meltdown (18)
As some investors leave, and new ones replace them, the volatility in gold prices will remain high. What we need to ask is are these new investors speculators or is there some fundamental reason new investors are coming into the market?
New Powershare ETFs Give Exchange Traded Fund Investors New Ways To Profit In Down Markets (19)
Domestic equities, Emerging markets, Asian markets, and even after a weeks rally, metals and energy markets have turned down again. So other then cash is there any place to put your money?
A Unique Precious Metals Exchange Traded Fund Is Launched Under A Cloud Of Worry (20)
All these funds have come into being with a great deal of fanfare. This new fund which tracks the Gold Miners Index happened to have been launched during one of the most precipitous drops in precious metals prices seen in years.
Newer Articles Highlighter:
Penny Stocks: A Good Investment (1)
The share prices are so low that most people have the tendency to believe that they make for an excellent investment because with the price being so low, it would seem that the stock can not go anywhere but up.
Understanding Auto Insurance (2)
This number should be equal to the liability you have for bodily injury and property damage. This coverage is mandatory in most states. It covers you if you are involved in an accident and the other driver was at-fault, but that other driver either does not have insurance or their coverage is not adequate to compensate you for your damages.
Common Investment Scams (3)
Use your common sense when deciding whether or not you want to invest in a relatively unknown company. Do some research before you invest in and you should do fine.
P/E Or PEG, Which Is Better? (4)
Or, the low ratio might indicate that the company is currently undervalued, making it a good buy because as long as the company is expected to have stable earnings growth in the future, then the share price will go up.
Tax Consequences Of Municipal Bonds (5)
The interest is usually still expempt from federal or state tax, unless the bond has specific provisions that stipulate otherwise. So, if you are going to buy a municipal bond, or any bond for that matter, that has already been issued to someone else, you need to look at the price of the bond relative to its face value to ascertain what the yield to maturity will be.
Introduction To Mutual Funds (6)
There are literally trillions of dollars of American money currently invested in mutual funds. Funds have made investing for the average investor a little less complicated. A person no longer has to sift through stocks individually in the newspaper or spend hours watching the financial news on television.
Introduction To Day Trading (7)
Margin orders are not recommended for inexperienced investors. Another popular trading strategy is called short selling. This is where the trader borrows a stock from a financial institution and then sells it, hoping that the price will go down in the near future so that the trader can buy the stock back at a lower price when it comes time to return the stock to the lender.
What Mergers Mean For Your Investments (8)
You should examine the income statement and balance sheet of the other company involved in the acquisition to get a sense of whether the merger will be beneficial or detrimental.
Understanding Your Insurance Policy (9)
So, if you look within your insurance contract, you will likely see the words indemnify or indemnity peppered throughout the document. The basic principle of indemnity is that the insurance company will not pay you any more than the amount of the loss suffered.
Is Your Stockbroker A Crook? (10)
I hope this information will help you determine whether you have a good broker. Make sure your broker works for a reputable brokerage house and not some fly-by-night cold calling establishment.
Introduction To The Forex Market (11)
There is no central exchange or meeting place for the Forex. All trading is done over computer networks between traders in different parts of the world. Also, unlike the stock market, the foreign exchange market is open 24 hours per day, because it is a global market.
Stock Market Basics (12)
Within an exchange, there is the primary and secondary market. The primary market is for the initial sale of shares in a company for the first time to the public, as with an IPO.
The FOREX Market Is A Goldmine (13)
With equities, it is not uncommon for a trader to buy a stock, and then a negative press release causes the stock to lose considerable value within a day or even a couple of hours.
What Is Breakup Value? (14)
If that happens, it is possible that the only way that you will be able to recoup your investment is when the assets are liquidated so that the bondholders and shareholders can be compensated.
How To Select Mutual Funds (15)
They are different than stocks when it comes to fees and expenses. As with stocks, funds are subject to capital gains taxes. But a fund is sometimes subject to a front-end and/or back-end load.
Why You Should Invest In Penny Stocks (16)
Penny stocks are defined differently depending on who you talk to. Stockbrokers define them as any stock that trades below $5 per share. Regulatory agencies sometimes classify them as a stock with a price below $2.
Why I Like Penny Stocks (17)
Sometimes a company has a great new invention or an exciting technology, but if it is not something practical that consumers are going to want or need, then it does not matter how great it is.
Learn To Avoid Market Timing (18)
Make sure you know something about the company you are going to invest in before deciding which strategy will best help you to avoid the pitfalls of market timing. Jim Pretin is the owner of www.forms4free.com, a service that helps programmers make a free HTML form and download formmail.
How You Can Avoid Market Timing (19)
If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of my investment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of my investment for the first and second quarter to $2,000.
Penny Stocks Can Be Lucrative (20)
I will now outline for you what you need to know about penny stocks and how to find the best one in which to invest. Penny stocks are defined differently depending on who you talk to.