The Balance Sheet: What a Company Owns, Owes and Keeps

A hypothetical company’s balance sheet fits in one line: $2,000 million of assets equals $1,200 million of liabilities plus $800 million of equity.

Assets sit on the left, with liabilities and shareholders’ equity on the right. The two sides always match, because every dollar the company holds was borrowed from a lender, is owed to a supplier or an employee, or was put in by the owners, whether they bought shares when the company issued them or left profits in the business year after year when those profits could have gone out as dividends. If a balance sheet ever fails to balance, the typing is wrong.

The income statement covered a stretch of time. The balance sheet is a photograph taken on the last day of the quarter.

Reading it in a 10-Q

In a Form 10-Q the condensed balance sheet usually sits near the front of the financial statements. Check the column dates. The comparison column is the end of the last fiscal year, which catches people who expect the same quarter a year earlier, so a third-quarter balance sheet is set against the year-end figure from nine months before.

Assets are listed roughly by how fast they turn into cash. Cash comes first, then short-term investments, accounts receivable (money customers owe) and inventory. Those are current assets, expected to be used or collected within a year. Property, equipment, goodwill and other long-lived assets follow.

Liabilities follow the same order. Current liabilities, due within a year, include accounts payable, accrued expenses and any debt coming due. Long-term debt and other long-term obligations come after. Equity closes the page, and inside it retained earnings is the running total of profits the company has kept after dividends: the “keeps” in the title.

The worked balance sheet

The hypothetical company, figures in millions, reports total assets of $2,000. Of that, $750 is current. Total liabilities are $1,200, of which $500 is current. Equity is $800, and 1,200 plus 800 is 2,000, so the sheet balances.

The ratios come straight off those lines.

A current ratio of 1.5 means the company holds $1.50 of short-term assets for every dollar due within a year. Debt to equity of 0.75 means lenders have put in 75 cents for every dollar the owners have. Neither number means much alone.

Notice that total debt, $600, is half of total liabilities. The other $600 is things like supplier bills, wages owed and money customers paid in advance, which are obligations that charge no interest and carry no maturity date for a lender to enforce. Mixing the two up makes a company look twice as indebted as it is.

What to watch between quarters

A single balance sheet tells you less than two side by side. Put this quarter’s figures against the prior column and start with the lines that move first when something is going wrong.

Start with cash. A falling balance is fine if it went into buying back stock or building a plant. It’s a question if it went into covering losses.

Then receivables. Say they rise from $200 million to $260 million, up 30%, while quarterly revenue stays flat. Customers are taking longer to pay, or the company is offering easier terms to keep sales up, and either way the reported revenue is turning into cash more slowly than it did, which is the kind of gap the cash flow statement puts in dollars.

On inventory, stock building up faster than sales can mean goods that won’t sell at full price, and markdowns tend to show up later in gross margin.

Last, debt. Rising borrowings with flat or falling equity push debt to equity up, and the interest cost lands on next quarter’s income statement.

Where the balance sheet stops

Book values are mostly historical cost. A building bought decades ago may sit on the balance sheet far below what it would sell for, and goodwill from an old acquisition may sit far above what the acquired business is worth now. Equity is an accounting figure, and the price the whole company would fetch can sit a long way from it.

That gap between book figures and what things are worth is the room an investor looks for when buying with a margin of safety. For practice spotting what the headline hides, try the earnings results quiz, or browse the rest of the earnings section.

The balance sheet shows where the company ended the quarter, and the cash flow statement, which the course takes up next, shows how the cash got from the opening figure to the closing one.