What Is a Balance Sheet?

Investing Lesson 3 - Analyzing a Balance Sheet

Pretend that you are going to apply for a loan to put a swimming pool into your backyard. You go to the bank asking to borrow money, and the banker insists that you give him a list of your current finances. After going home and looking over your statements, you pull out a blank sheet of paper and write down everything you have that is of value (your checking and savings account, mutual funds, house, and cars). Then, at the bottom of the sheet your write down all of your debt (the mortgage, car payments, and your student loan). You subtract everything you owe by all the stuff you have and come up with your net worth.

Congratulations, you just created a balance sheet.

Balance Sheets Required by the Securities and Exchange Commission

Just as the bank asked you to put together a balance sheet to evaluate your credit-worthiness, the government requires companies to put them together several times a year for their shareholders. This allows current and potential investors to get a snapshot of a company's finances. Among other things, the balance sheet will show you the value of the stuff the company owns (right down to the telephones sitting on the desk of their employees), the amount of debt, how much inventory is in the corporate warehouse, and how much money the business has to work with in the short term. It is generally the first report you want to look at when valuing a company.

Before you can analyze a balance sheet, you have to know how it is set-up.

^{Note: Unlike other financial statements, the balance sheet cannot cover a range of dates. In other words, it may be good "as of December 31, 2009", but can't cover from December 1 - December 31. This is because a balance sheet lists items such as cash on hand and inventory, which change daily.}

Next page > What Does a Sample Balance Sheet Look Like? > Page 1, 2, 3, 4, 5, 6, 7, more >>

This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.