Ready to dive into some of that quantitative data we mentioned in the last chapter? As an investor, you should develop a basic understanding of the most commonly used financial metrics and the financial statements on which they are based.
There are three main financial statements companies produce on a quarterly and annual basis. They are the balance sheet, the income statement, and the cash flow statement. All three can be used to help you understand a company’s financial profile—if it is healthy, growing, efficient, profitable, et cetera.
The first statement we’ll look at is the balance sheet. The balance sheet is a statement of the financial position of the company at a particular moment in time. It shows assets (how much a company owns or is owed) and liabilities (how much a company owes in debt or other obligations) at a specific point in time. It also shows the stockholders’ equity in the company, which is the assets minus the liabilities.
That is why it is called a balance sheet: the total assets must equal the total of the liabilities plus stockholders equity. As an investor, you want to find companies who can manage their assets and liabilities wisely and generate a good annual return on your stockholders’ equity.
Assets and liabilities are detailed according to whether they are current or non-current. Current means liquid or due within the current accounting year. Examples of current assets are cash, short term investments such as bonds, and product inventory. Current liabilities include accounts payable and short-term loans. Non-current means illiquid or longer term. Examples of non-current assets are buildings and equipment, and examples of non-current liabilities are long-term leases and loans. The image below shows current and non-current items called out with red arrows.
Stockholders’ equity (AKA shareholders’ equity or book value) is total assets minus total liabilities. Stockholders’ equity represents the equity stake currently held on the books by a firm’s equity investors. For example, in the image above, the stockholders’ equity is $35,169M, which is $117,855M (total assets) minus $82,686M (total liabilities).
When exploring balance sheet information in Stock Rover, here are a few things to look at:
For a list and definitions of other metrics based on data in the balance sheet, go here.
In summary, the balance sheet is a good place to get a quick take on the company’s liquidity and financial position as you start to build an overall picture of the business. It’s especially useful to use it alongside the income statement and cash flow statement, which are covered in the next chapters.
Get to know the balance sheet with these tasks.
For instructions on finding all of this information in Stock Rover, see this appendix.
Next: Income Statement
This guide was created in partnership with bivio, which provides online investment club accounting and hedge fund management services.