Fundamental Analysis

The balance sheet provides a snapshot of a company's financial position at a specific point in time, showing what the company owns (assets) and owes (liabilities). Balance Sheet Equation: Assets = Liabilities + Shareholders' Equity This fundamental equation must always balance, hence the name "balance sheet." Assets (What the company owns): 1. Current Assets (convertible to cash within 1 year): • Cash and Cash Equivalents - Most liquid assets • Accounts Receivable - Money owed by customers • Inventory - Raw materials, work-in-progress, finished goods • Short-term Investments - Marketable securities • Prepaid Expenses - Advance payments for future expenses 2. Non-Current Assets (long-term assets): • Property, Plant & Equipment (PPE) - Fixed assets for operations • Intangible Assets - Patents, trademarks, goodwill • Long-term Investments - Investments held for more than 1 year • Deferred Tax Assets - Future tax benefits Liabilities (What the company owes): 1. Current Liabilities (due within 1 year): • Accounts Payable - Money owed to suppliers • Short-term Debt - Loans due within 1 year • Accrued Expenses - Expenses incurred but not yet paid • Current Portion of Long-term Debt 2. Non-Current Liabilities (long-term obligations): • Long-term Debt - Loans due after 1 year • Deferred Tax Liabilities - Future tax obligations • Pension Obligations - Employee retirement benefits • Other Long-term Liabilities Shareholders' Equity (Owners' stake): • Share Capital - Money raised from issuing shares • Retained Earnings - Accumulated profits not distributed as dividends • Other Comprehensive Income - Unrealized gains/losses • Treasury Stock - Company's own shares bought back Key Balance Sheet Ratios: 1. Current Ratio = Current Assets / Current Liabilities • Measures short-term liquidity • Ideal range: 1.5 to 3.0 • Higher is generally better, but too high may indicate inefficiency 2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities • More stringent liquidity measure • Excludes inventory as it may be hard to convert to cash quickly • Ideal range: 1.0 to 1.5 3. Debt-to-Equity Ratio = Total Debt / Total Equity • Measures financial leverage • Lower ratios indicate less financial risk • Industry comparison is important 4. Asset Turnover = Revenue / Total Assets • Measures efficiency in using assets to generate sales • Higher ratios indicate better asset utilization • Varies significantly by industry Red Flags in Balance Sheet: • Declining cash levels over time • Increasing debt without corresponding asset growth • Large amounts of goodwill (from acquisitions) • Significant off-balance-sheet liabilities • Frequent changes in accounting policies Quality Indicators: • Strong cash position • Low debt levels • Growing tangible assets • Consistent accounting practices • Transparent disclosure