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Balance sheet shows the financial position of a firm at a particular point of time. Knowing how to read balance sheet can help you in stock investing. Balance sheet shows the firms asset, which are resources used in its operation like cash, office equipment, and building. The balance sheet also shows liabilities (claims of creditor to assets) and stockholders’ equity (claims of owner to assets). The company gets their resources (assets) from borrowing (liabilities) and from their investor (equity). Thus assets = liability + equity.
So how do you know a company is good or not from its balance sheet? A good company will always grow their assets, means that they are expanding. Increasing liability could be good or bad. Too much debt / liability is not good for the company, because it will have more risk. The company might not able to pay all their debt. When reading balance sheet, always check the change of asset, and liability from the same period last year. For example, compare the first three months asset this year with the first three months asset last year. Also, check balance sheet with other company’s balance sheet in the similar industry, preferably the same size. Younger company will grow more then mature company. If company A’s asset grows 10 percent, and company B’s asset grows 20 percent, then it means that company B is better.
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