Balance Sheet Defined and Explained


A balance sheet is a financial accounting document provided by a publicly traded company to the public interest summarizing the company's assets, liabilities, and capital. In particular, it details the balance of income and expenditure over a period of time.


What is a Balance Sheet

This financial paperwork is very important to the average investor because it shows how well a company is doing financially.

You, as an investor, don't want to invest in a company that isn't doing very well, for instance, holding more liabilities than they can afford.

It's just like looking at your own personal budget. It shows specifics like the worth of assets held, the amount of liabilities owed, the amount of revenue during the reporting period, the amount going to pay off liabilities.

But a company's balance sheet is a lot more complicated and vital to the valuation of their stock price.





A Balance Sheet Can be Summarized into the Following Equation


Assets = Liabilities + Shareholders' Equity


In order for the document to be correct, each part of the equation above must balance out.




An Actual Financial Snapshot from Ford Motor Company

Ford Motor Company Balance Sheet

Overall, it is a picture, at the current time, showing where the company's finances are at that particular moment. It doesn't go into explicit detail. It shows "Inventories - Total" in the Assets, but isn't specific about what all is contained within the Inventories.

It shows no trends, but is a valuable tool when compared against other sheets from other periods or when comparing data from other companies within a particular market sector.

Now this one has five years of data on it, so it can show some kind of trend, primarily, whether the company is growing steadily or remaining pretty much the same throughout the five year time frame.

As you can see, each year's Total Liabilities balance out with the assets.

There are other financial documents included such as a Cash Flow statement and Income Statement and each can tell you a little bit more about the company.

You should always research the company before investing in them. Once all of your signals point toward buying the stock, take a look at the company profile, see what the company does for income, look back in time as far as you can and check out the history of the stock, read the news about the company, and by all means, look over the balance sheet and other financial documents to see if the stock is a strong buy.



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