Balance sheet

What is a balance sheet?

The balance sheet (the “statement of financial position” in IFRS language) is a snapshot of the company on one day, usually the last day of its financial year, such as 30 June. It has three parts: assets (what the company has), liabilities (what it owes), and equity (what belongs to shareholders after the debts).

Its core equation is: assets = liabilities + equity. The money for every asset the company holds came either from borrowing or from the owners’ money (and retained profit). So the two sides are always equal, hence the name “balance” sheet.

Why it matters to an investor

• It shows how much the company runs on debt. In bad times heavily indebted companies get into trouble first, because interest and instalments are due even when there is no profit.
• It shows whether the company has enough cash and easily sold assets to meet the debts due in the next year.
• Net asset value per share (NAV) and ratios such as P/B, ROE and debt-to-equity are all calculated from figures here.
• It helps check the income statement: if profit rises but money owed by customers (receivables) and stock pile up even faster, questions arise.

The three parts in more detail

• Non-current assets: things used for more than a year, such as land, factories, machinery and long-term investments in other companies. Machinery’s value is reduced a little each year as depreciation.
• Current assets: expected to turn into cash within a year, such as stock (inventory), money owed by customers (receivables), and cash and bank balances.
• Liabilities: long-term loans (non-current), and debts due within a year (current), such as amounts owed to suppliers, short-term loans and tax payable.
• Equity: share capital (paid-up capital), plus profits kept after paying dividends year after year (retained earnings), and some reserves.

NAV: net asset value per share

Divide total equity by the number of shares and you get net asset value per share, or NAV per share (also called book value per share). In Bangladesh, under BSEC directions, listed companies publish NAV per share and net operating cash flow per share (NOCFPS) alongside EPS in their quarterly results, compared with the previous period.

But NAV is a book value, not what the assets would fetch if sold. Land bought long ago may be worth far more, while idle machinery or debts that will never be collected may be worth much less than the books say. Things like a brand or skilled staff usually do not appear on the books at all.

Where to look closely

• Current assets against current liabilities: if debts due within a year exceed the assets that will turn into cash within a year, the company may have to rely on new borrowing or selling assets.
• Receivables and inventory jumping: if they grow much faster than sales, either money is not being collected or goods are not selling.
• Debt over the years: if loans keep rising while profit does not, look for the reason in the notes.

Worked example

Common mistakes

• Treating NAV as the company’s “true value”. It is a book value, not a sale price or the value of the business.
• Seeing large total assets and assuming the company is strong, when much of it was bought with borrowed money.
• Looking at a single year. Where debt, receivables and inventory are heading only shows when several years are side by side.
• Skipping the notes. Which assets are pledged, and any lawsuits or guarantees, are often only found there.

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