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)
There are two different types of stock: common stock and preferred stock. Common stock represents ownership in a corporation. Holders of this type of security exercise control by electing a board of directors and voting on company policy.
How To Get Real Estate Listings Via Real Estate Marketing Articles (2)
Regular communications via newsletters will enable you to develop relationships with your readers and may eventually lead to them transacting their real estate needs with you when they are ready to buy or sell.
Holiday Insurance - A Necessity Or A Luxury? You Decide (3)
(c) 2007 Best Holiday Insurance Guide. 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)
Instead, it is one of the best alternatives that you can use in case you run out of cash in times when you need it most. You need to pay for your electric bills, existing mortgages, tuition fees of your children, and other essential expenses yet you do not have enough cash to pay for those expenses.
The Benefits Of Gathering Relocation Information (5)
There is much that you can find out about a new area by conducting a little online research. If you need to relocate quickly, the Internet can be very helpful.
Credit Card Types: Unsecured (6)
If the new card has a substantially lower interest rate you can save money. Annual Percentage Rate: Of particular interest to anyone who plans to apply for or use an unsecured credit card is the APR that is associated with the card.
MyOwn10-Key - How To Balance Your Checking Account Without First Entering All Of Your Transactions (7)
If needed, bring your register balance up to date to reflect the new entries. 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)
It is intended as more of a long term investment and should not be used for frequent trading due to potential negative tax consequences. Traders could be lured into potentially damaging and costly trading.
Despite Slowdown California Home Prices Set New Record (9)
As strange as it sounds, homes need to be priced right and be in pristine condition in order to sell. During the buying frenzy this was not the case.
Two New Exchange Traded Funds Allow Unique Oil Investment Strategies (10)
Claymore also operates a fund (DCR) that is designed to provide positive returns to investors when the price of oil is falling. Using these two funds, investors have a number of ways to invest in oil prices and devise their own hedging strategies.
New Fund For Indian Investors Can Benefit U.S. Investors (11)
India is a large market for gold. So if Indian investors start pouring their money into Gold related funds, more physical product will be held off the open market making gold even a scarcer commodity.
Exchange Traded Funds Venture Further Into Foreign Currency Markets (12)
They will be introducing Exchange Traded funds covering the British Pound, Austrailian Dollar, Canadian Dollar, Mexican Peso, Swedish Krona and Swiss Franc. Many investment advisors would caution investors in putting money into currencies due to volatility.
California Foreclosure Activity Up By The Biggest Margin In 14 Years- Is The Bust Starting? (13)
There are a number of other factors that need to be watched. These include the amount of equity the homeowner has in the home and the type of mortgage they have.
Using ETFs To Invest In A Good Performing Commodity Sector You May Have Missed (14)
With many exchange traded funds down or just treading water for the year so far, PHO is performing above average. As of July 6th it is up over 9% which is not bad for the recent market conditions.
Best Performing Exchange Traded Funds For 2006 Thru August (15)
The news is filled with doom and gloom about the residential real estate market, however, the real estate related ETFs tend to focus on commercial real estate. The fund leading the pack so far this year is iShares Cohen & Steers Realty Majors (ICF).
Real Estate Schemes Prey On Homeowners And Lenders (16)
AGain the outcome was predictable, homeowner foreclosure. Also common are techniques that strip homeowners of their equity in their home. Homeowners in debt are easy targets for this type of fraud.
California Real Estate Market Gives Mixed Messages (17)
That's down from 54,500 in March which is a drop of 13.3%. April of 2005 was one of the strongest months for real estate in California's history. What a difference a year makes.
A New Exchange Traded Fund May Have A Major Impact On Long Term Silver Prices (18)
It is driven by long term trends. This particular trend started with the introduction of the gold standard and the end of the use of silver as money. With the introduction of the new Silver ETF, this long term trend is reversing.
Another Way Of Looking At The Gold Price Meltdown (19)
The strong demand continues into the first quarter of 2006. During this same period of time, demand for gold related Exchange Traded Funds has risen 23%. India is the largest buyer of gold in the world.
New Powershare ETFs Give Exchange Traded Fund Investors New Ways To Profit In Down Markets (20)
ProShares Advisors has come up with four new funds that address the problem. These funds are know as the UltraShort ProShares. These are the first Exchange Traded funds to provide magnified short exposure to major market indexes.
Newer Articles Highlighter:
Penny Stocks: A Good Investment (1)
Do your homework on the companies you are going to invest in and you will do fine. Jim Pretin is the owner of www.forms4free.com, a service that helps programmers make email forms.
Understanding Auto Insurance (2)
Comprehensive covers you for damage done to your vehicle when caused by things such as fire, theft, a rock hitting the car, or hitting an animal on the road. Collision pays for damage to your vehicle when the cause is an accident involving a collision with another car or other object on or near the road.
Common Investment Scams (3)
Avoid prime bank solicitations like the plague. I hope this information will help you avoid falling prey to investment scams. However, do not be afraid to invest in companies just because there is some pumping and dumping.
P/E Or PEG, Which Is Better? (4)
The higher the ratio, the more expensive the stock is relative to its current earnings. However, that does not give you the full picture. The reason why some companies sometime trade at very high price-to-earnings ratios is because they are expected to grow tremendously in the months and years ahead.
Tax Consequences Of Municipal Bonds (5)
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)
Keywords: mutual funds If you know absolutely anything about investing, then you have probably heard of mutual funds. Once an obscure investment vehicle, they are now popular with almost all investors.
Introduction To Day Trading (7)
Others look for changes in momentum and will hop in at the beginning of an upswing and then ride it out until the upswing is over. This is known as momentum trading.
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)
Another basic principle of your policy is that it has a legal purpose. In other words, the policy does not encourage you to engage in illegal activities. If it does, the contract is not valid.
Is Your Stockbroker A Crook? (10)
Neophyte investors have unknowingly hired these sorts of brokers, and when they get their annual statement they are shocked to find that they made a lot less than what they thought, and in some cases actually got a negative return on their investments.
Introduction To The Forex Market (11)
The ask is the amount of foreign currency that someone is demanding in order to be willing to sell $1 U.S. base currency. The Forex markets are generally considered to be less volatile than then stock market because within the course of a trading day, it is highly unlikely for the value of a single currency to move all that much.
Stock Market Basics (12)
A full-service broker offers a wider array of investment vehicles for you to put your money into, such as stocks, bonds, derivatives, annuities, and some also sell life insurance. A discount broker, on the other hand, does not have access to all these investment vehicles.
The FOREX Market Is A Goldmine (13)
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.
What Is Breakup Value? (14)
As a result, the corporation may have to sell several of their businesses in order to restore the bottom line. Another reason why a company could be broken up is if one of the divisions within the company, although it might be profitable, is holding back the growth of the other divisions.
How To Select Mutual Funds (15)
As with stocks, the price fluctuates on a daily basis and it can be sold just like any other security. When deciding what fund to invest in, you need to consider your investment goals.
Why You Should Invest In Penny Stocks (16)
Here are the questions you need to ask yourself when analyzing the probability that a company will be successful: 1) Barriers to Entry: Are there are obstacles that will make it difficult for the company to sell its products or services?
Why I Like Penny Stocks (17)
Number one, you need to do some research and try to find out how many shares the company has in its float. The float is the number of shares that are currently being traded.
Learn To Avoid Market Timing (18)
Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share.
How You Can Avoid Market Timing (19)
Dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as the stock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price.
Penny Stocks Can Be Lucrative (20)
It is usually contained in articles written about the company, or in TV or radio interviews with company officials that are sometimes archived on certain websites. You can also look for the information on message boards or forums where stock traders chat with each other.