The balance sheet

Financial analysis is the process of interpreting and evaluating a company’s performance and position in the context of its economic environment, for achieving this goal we have to describe articles of financial statements which helps us to understand better of the target company’s business model.

The Balance Sheet: The balance sheet discloses what an entity owns (assets), what an entity owes (liabilities), and the owners’ interest in the net assets of a company (equity) at a specific point in time. or what the firm owns and how it is financed.

Asset= Liabilities+ Equity

For Analyzing balance sheet first, we know about liquidity, debt versus equity, and value versus cost.

• Liquidity describes how easily and quickly assets can be turned into cash without losing value. Current assets, like cash, accounts receivable (money owed by customers), and inventory (raw materials, work-in-progress, and finished goods), are the most liquid, as they can typically be converted to cash within a year. Fixed assets, such as property, plant, equipment, and intangible assets like trademarks or patents, are less liquid and not usually used to cover short-term expenses like payroll. While having more liquid assets reduces the risk of financial difficulties by making it easier to meet short-term obligations, they often yield lower returns compared to fixed assets, meaning firms may miss out on more profitable investments by focusing too much on liquidity.

• Liabilities are amounts a company owes and must pay in cash within a set time, like a $10,000 bank loan with interest due in a year or a $5,000 bill for supplies due in 30 days. These debts often come with fixed payments, called debt service, and if the company doesn’t pay, creditors (like the bank) can take legal action. Stockholders’ equity is what’s left for the owners after paying all debts, like owning a $100,000 building with a $60,000 mortgage—equity is the $40,000 difference. If the company earns $10,000 in profit and keeps $6,000 instead of paying it as dividends, that $6,000 boosts stockholders’ equity (retained earnings are added). Creditors, like those owed for the loan, get paid before shareholders if the company runs into financial trouble.

• The accounting value of a firm’s assets is frequently referred to as the carrying value or the book value of the assets the book value of the assets. Market value is the price at which willing buyers and sellers would trade the assets. So, when we say the goal of the financial manager is to increase the value of the stock, we usually mean the market value of the stock, not the book value. The distinction between book and market values is important precisely because book values can be so different from market values.