Continuing the Fundamental Analysis series…here is another post.

What really is a Balance sheet?

It is a summary of the assets that a company owns and the money that is owes to outsiders. Remember as far as the company is concerned, you the shareholder, is an outsider too.

Remember – it has its own existence?

Also the word ‘Balance’ is one of the basic concepts of accountancy – every debit has a credit. If a company wants to buy something (or incur an expense) it needs money and this has to come from its shareholders or lenders. A Balance sheet has a list of assets (on the Right side) and liabilities (borrowings) on the Left side.

Another way of looking at a balance sheet is to look at it as a ‘Sources and Application of Funds’. This also helps you undersatnd that

Assets = Liabilities + Share owner’s funds

 The balance sheet has all the assets – and is usually arranged in a manner that the least liquid asset (Factory, Land, buildings) are at the top, followed by machinery, then by current assets (like debtors, stocks, raw material, and cash).

On the other side (liabilities) is the share capital (owners funds), followed by the surplus that the business has retained (without giving it to the shareholders) – called Reserves (this is also part of owners funds). Then come the long term borrowings (banks and institutions lend money to companies), debentures, etc. Then follows short term borrowings from banks, and then current liabilities. The current liabilities are things like bank borrowing, loans which have to be repaid in 1 year or less, amount payable to vendors, etc…

Is it easy to understand or does it sound like a regulator’s take away? If this is tough to understand, will try to do better the next time….

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  1. Respected Sirs,

    This letter is addressed to you because you have the authority to take decisions on many issues of serious nature facing our country. We all know our economy is in deeper troubles than what we are seeing in the media.
    We are dependent on FII money (money comes in to share market for trading – I do not want to tell this is investment) to pay our daily bills.
    Our industrial output is in -negatve zone for the past few months
    The car sales (leading indicator for money flow) is in -ve zone for the past few months
    Regarding current account deficit the lesser said is better. Good economists say the situation is similar to 1991(Good economists not like Ahluwalia type)
    The inflation is in double digit – I consider CPI as the true indicator and anybody who talkes about WPI is a cheat in my opinion as WPI – (continued)

  2. Thank you sir for this second post in the balance sheet analysis series.. I think the level of detail is fine, but I would like you to help us in understanding what to look out for in a balance sheet for deciding on the stock. If possible, pls provide some examples..

  3. thank you Subra
    this is a good primer and a reminder for me.. very easy to absorb and use..

    As Satish pointed, can you please highlight this using examples-in your own style 🙂

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