{"id":22496,"date":"2020-06-01T12:00:34","date_gmt":"2020-06-01T11:00:34","guid":{"rendered":"https:\/\/traders-paradise.com\/magazine\/?p=22496"},"modified":"2020-07-20T11:08:11","modified_gmt":"2020-07-20T10:08:11","slug":"read-balance-sheet-before-investing","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/","title":{"rendered":"Why Read a Balance Sheet Before Investing"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#The_balance_sheet_used_with_income_and_cash_flow_statements_is_an_important_tool_for_every_investor_and_has_to_be_read_before_investing\" >The balance sheet, used with income and cash flow statements, is an important tool for every investor and has to be read before investing.<\/a><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#By_Guy_Avtalyon\" >By Guy Avtalyon<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#Total_Liabilities_Shareholder_Equity_Total_Assets\" >Total Liabilities + Shareholder Equity = Total Assets\u00a0<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#What_info_you_can_read_in_a_balance_sheet\" >What info you can read in a balance sheet?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#How_to_calculate_the_companys_debt-to-equity_ratio\" >How to calculate the company&#8217;s debt-to-equity ratio?<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#Debt-to-equity_ratio_total_liabilitiestotal_shareholders_equity\" >Debt-to-equity ratio = total liabilities\/total shareholders&#8217; equity<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#How_to_check_if_the_company_is_able_to_meet_short-term_obligations\" >How to check if the company is able to meet short-term obligations<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#50000250002\" >$50.000\/$25.000=2<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#5000025000142\" >$50.000\/$25.000=1,42<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#Read_a_balance_sheet_before_investing\" >Read a balance sheet before investing<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#What_are_the_current_assets\" >What are the current assets?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#What_are_non-current_assets\" >What are non-current assets?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/06\/read-balance-sheet-before-investing\/#Why_reading_a_balance_sheet_is_important\" >Why reading a balance sheet is important<\/a><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"The_balance_sheet_used_with_income_and_cash_flow_statements_is_an_important_tool_for_every_investor_and_has_to_be_read_before_investing\"><\/span><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-22497\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2020\/06\/balance-sheet-t-1.jpg\" alt=\"Read a Balance Sheet Before Investing\" width=\"800\" height=\"578\" \/><br \/>\n<strong>The balance sheet, used with income and cash flow statements, is an important tool for every investor and has to be read before investing.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<h6><span class=\"ez-toc-section\" id=\"By_Guy_Avtalyon\"><\/span><a href=\"https:\/\/www.linkedin.com\/in\/guy-avtalyon-67941b54\/\">By Guy Avtalyon<\/a><span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p><span style=\"font-weight: 400;\">Every single investor <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/02\/how-to-read-stock-charts\/\"><span style=\"font-weight: 400;\">must know<\/span><\/a><span style=\"font-weight: 400;\"> how to read a balance sheet before investing in some company. It is one of the three most important reports that can tell you some valuable information about a company&#8217;s condition. The other two sources of such important information are the income statements and cash flow. If you know how to read a balance sheet, income statements, and cash flow reports, you&#8217;ll be able to make a proper investment decision.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While you read a balance sheet you&#8217;ll find out almost everything about the company&#8217;s financial status for a particular period. The balance sheet reveals what assets the company owns, what are its liabilities, how much in debts. Also, you&#8217;ll figure out how big is the owners&#8217; capital, how many shareholders there are, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The basic balance sheet calculation is:<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Total_Liabilities_Shareholder_Equity_Total_Assets\"><\/span><b>Total Liabilities + Shareholder Equity = Total Assets<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">When you read a balance sheet of the company, you&#8217;ll notice that it consists of two parts as it is shown in the equitation above. This means the total assets of the company have to be equal to the sum of total liabilities and shareholder equity. In other words, the assets are balanced to the obligations at a particular point in time.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_info_you_can_read_in_a_balance_sheet\"><\/span><b>What info you can read in a balance sheet?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">For example, information about the company&#8217;s financial condition at the end of the year. You have to evaluate a company and read a balance sheet before investing in a company. The balance sheet shows which are the company&#8217;s sources, debts, owners&#8217; interests, etc. By examining the balance sheet and with the help of a few <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/01\/volume-weighted-average-price-vwap-all-calculation-practices-and-mistakes\/\"><span style=\"font-weight: 400;\">calculations<\/span><\/a><span style=\"font-weight: 400;\">, you can improve your odds of getting in a good investment.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, in the assets section, you&#8217;ll find the value of stocks the company owns, what are the company&#8217;s investments. Also does the company own real estate, how advanced is its equipment. You&#8217;ll find much other important info. But always keep in mind that you have to compare the amount of the cash and equivalents balance of the company. It is better if the company has a large amount of cash. That will provide a room to grow the business, and also, to pay dividends.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Read the balance sheet liabilities to estimate how much debt the company has. The lower is better, of course. Every investor should know if the company has some loans or deferred wages to its employees. <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/the-settlement-period-for-stocks-what-is-t1-t2-and-t3-timeline\/\"><span style=\"font-weight: 400;\">This info <\/span><\/a><span style=\"font-weight: 400;\">might cause the investor to get into investment or stay away.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Also, you&#8217;ll figure out the amount of shareholders&#8217; equity, the higher is better. But also, in this section, you can find how much money the company got from investors from the preferred and common stocks. The balance sheet shows the earnings the company has but has not been paid as dividends from the start-day to the particular period you are examining.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_calculate_the_companys_debt-to-equity_ratio\"><\/span><b>How to calculate the company&#8217;s debt-to-equity ratio?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">To calculate the company&#8217;s debt-to-equity ratio you&#8217;ll have to divide the company&#8217;s total liabilities by its total shareholders&#8217; equity.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Debt-to-equity_ratio_total_liabilitiestotal_shareholders_equity\"><\/span><b>Debt-to-equity ratio = total liabilities\/total shareholders&#8217; equity<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">If this ratio is below 1 that would mean the company has more equity than debts. So, you can easily conclude that investing in such a company carries less risk. Hence, if the debt-to-equity ratio is above 1 you can be sure the company has less equity than debts. That is in connection to financial problems that could push the company to a business crisis.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For instance, the company has $200.000 in total liabilities and $400.000 in shareholders&#8217; equity. When we divide $200.000 by $400.000 to count a debt-to-equity ratio we will find it is\u00a0 0.50. It isn&#8217;t the best but still quite acceptable debt level.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_check_if_the_company_is_able_to_meet_short-term_obligations\"><\/span><b>How to check if the company is able to meet short-term obligations<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">To calculate this current quick ratio you&#8217;ll need to divide its current assets by its current liabilities. Experts suggest, and we agree with them, the better is if this ratio is above 1.5.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, the company will be able to pay short-term debts if it has $50.000 in assets and $25.000 in liabilities.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"50000250002\"><\/span><b>$50.000\/$25.000=2<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">This is a great ratio. But if the company with $50.000 in current assets has $35.000 in current liabilities, the outlook would be quite different.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"5000025000142\"><\/span><b>$50.000\/$25.000=1,42<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">This isn&#8217;t a good ratio because it shows the company doesn&#8217;t have enough short-term assets to pay its bills.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Also, if you read a balance sheet, you must read <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/cusip-number-for-stocks-bonds-mutual-funds\/\"><span style=\"font-weight: 400;\">fine-prints<\/span><\/a><span style=\"font-weight: 400;\">. You didn&#8217;t pay attention? Well, you should. It can reveal some financial obligations that are not visible at first glance and that are not displayed in a balance sheet.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Read_a_balance_sheet_before_investing\"><\/span><b>Read a balance sheet before investing<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">When you read a balance sheet, you&#8217;ll notice that the \u201ccurrent assets\u201d are posted first. Because these are liquid assets, they are placed by order of liquidity. The criteria behind is which one can be turned into cash soon. For instance over the current year. The liquid assets are cash and its equivalents, inventory, accounts receivables, and\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The next part of a balance sheet is \u201ctotal assets.\u201d These are holdings that can&#8217;t be quickly turned into cash in the current year. This includes land, equipment, marketable securities, prepaid expenses, intellectual capital, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Likewise, current liabilities are shown first in the section of asset listing. For example, all debts in order of date dues, financial obligations expected within the current year. That could be outstanding interests, rent, salaries, and dividends. This list is followed by a list of total liabilities that incorporates pensions. Also, interest on bonds, the principal on bonds, etc.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The following is a total equity list also known as shareholder equity or net assets. This list incorporates saved or retained earnings, common and preferred stock, and extra paid-in funds.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_are_the_current_assets\"><\/span><b>What are the current assets?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Current assets have a duration of less than one year. In other words, they are accessible to turn into cash. Cash and cash equivalents such as checks and non-restricted bank accounts are the most important among current assets. Cash equivalents represent safe assets and can be easily turned into cash. Accounts receivables represent the short-term obligations that customers owe to the company. For example, when a company sells its product on credit, it will be in the list of current assets until the customers pay them off.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The inventory is also the current asset owned by the company. It can be everything that the company produces, raw materials, or other goods necessary in production.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_are_non-current_assets\"><\/span><b>What are non-current assets?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">They present assets that couldn&#8217;t turn into cash within the one-year time frame. They could be tangible assets, for example, machines, computers, factories, land, etc. But, non-current assets can be intangible assets also. For example,\u00a0 licenses, patents, brand name, or copyright.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_reading_a_balance_sheet_is_important\"><\/span><b>Why reading a balance sheet is important<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The balance sheet is a valuable piece of information for investors but has some limitations. The first comes from its inability to give full insight into the company&#8217;s business history since it shows only a part of it. You&#8217;ll need to know more to have a full understanding of the company. For example, income and cash flow statements.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Anyway, read a balance sheet before investing in some company because it can give you a more clear picture of the <\/span><a href=\"https:\/\/en.wikipedia.org\/wiki\/Business_operations\"><span style=\"font-weight: 400;\">company&#8217;s operations<\/span><\/a><span style=\"font-weight: 400;\">. If you read a balance sheet, you&#8217;ll understand what the company owes and owns. Its financial status will be clear to you. It is very important for investors to read a balance sheet, how to use it, how to analyze it. Reading a balance sheet will support your decision to invest or not in some companies.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The balance sheet, used with income and cash flow statements, is an important tool for every investor and has to be read before investing. By Guy Avtalyon Every single investor must know how to read a balance sheet before investing in some company. It is one of the three most important reports that can tell [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":22498,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1016,1012],"tags":[2009,2014,2011,2012,2008,2013,2010,2441,2440],"class_list":["post-22496","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-how-to-master-in-trading-advanced","category-traders-secrets","tag-balance-sheet","tag-cash-flow","tag-current-assets","tag-debt-to-equity-ratio","tag-how-to-read-a-balance-sheet","tag-income-statements","tag-non-current-assets","tag-read-a-balance-sheet-before-investing","tag-why-reading-a-balance-sheet-is-important"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin 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