The Importance of the Company Balance Sheet to Investors

By Stock Research Pro • January 9th, 2009

The company Balance Sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. The balance sheet is one of the three important financial statements for a company (the Income Statement and the Cash Flow Statement being the other two). In analyzing the balance sheet, investors can learn what the company owns and owes at that point in time.

The Components of a Balance Sheet

The balance sheet consists of two main sections: assets (typically shown on the left) and liabilities and shareholders’ equity (typically shown on the right).

The accounting equation for the balance sheet is as follows:

Assets = Liabilities + Owner’s Equity

The balance sheet must, of course, balance. That is, for every dollar of assets, there must be an equal dollar either borrowed or contributed by ownership.

Assets: The Resources this business has at its disposal to produce and market its product or service. Company assets include cash, receivables it is owed, inventory, investments, building, land, equipment and intangibles.

Liabilities: These are what the business owes. The liabilities of the company represent the portion of assets that are financed and include short and long-term borrowing and any money owed to suppliers or others.

Owner’s Equity: This represents what is contributed by business owners and includes not only funding from shareholders but also retained earnings.

The Importance for Investors

For investors, the balance sheet is an important document to review to learn how much cash the company has on hand, how much money the company owes and when those payments come due. It also identifies the most valuable assets of the company.

Many investors compare the current balance sheet of a company against its past balance sheets to determine whether the company is increasing its debt, building up inventories, depleting cash or any other trend that would raise concern.

To evaluate balance sheet health, many investors apply ratios (like liquidity and leverage) and use these to make comparisons against other companies and industry averages.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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