NSE #14: The Balance Sheet

Yesterday, I explained the Income Statement.

Today, we are moving on to Balance Sheet.

In the image above, is the Balance Sheet of Total Nigeria PLC for the year 2012 and 2011.

A Balance Sheet is a report of the companies assets, liabilities and equity at a specified date. Note: A specified date (in the report shown above, we have Total's balance sheet as at end of business on Dec 31 2012 and Dec 31 2011 and Jan 1 2011). It's unlike the Income Statement that shows financial details for a period (usually 1 year). A Balance Sheet shows all the company's worth as at the specified date in the report.

Assets are what the company owns, which are expected to provide future benefits. Liabilities are what the company owes.

A Balance Sheet can be separated into the following discrete parts:

1. Current Assets: These are the company assets that are expected to be used up or converted into cash within one year. It comprises the company's cash and cash equivalents, inventories (mostly unsold goods), account receivables (unpaid customer bills that are due within a year), and other less general current assets.
2. Non-Current Assets: These are all the other assets the company has that cannot be categorized as current assets. They include the company's fixed assets (buildings, land, plant, equipment) and Intangible Assets (value of patents, trademarks, goodwill/brand).
3. Total Assets: This is the sum of both the Current and Non-Current Assets. 
4. Current Liabilities: These are what the company owes and must pay back within a year. It comprises Short term debts and accounts payable. 
5. Non-Current Liabilities: These are the company's debts that are due after a year.
6. Total Liabilities: This is the sum of Current Liabilities and Non-Current Liabilities.
7. Equity: This is what is left for the owners of the company if the company was to sell out at the Assets' listed prices and pay all it's debts. It's calculated as Total Assets -- Total Liabilities.

In deciding whether to invest in a company or not, you'll like to know if:

• the company is able to meet all it's obligations that are due in a year without borrowing money. Current/Liquidity Ratio. It's simply dividing the Current Assets by the Current Liabilities. You'll want it to be be more than 1; meaning the company can pay it's current liabilities using it's current assets. In reality it might not be so (we'll talk more about this in Cash Flow Statement) as the company might be unable to collect all it's account receivables.
• the company can be profitable sold. This is not straightforward. Most times a company's assets can't be sold for the amount in it's balance sheet. Just the same way you can't sell your car at the same price you bought it. This is one of the art (non-science) part of stock analysis. The general rule is to take all the company's Cash and Cash Equivalent, take between 50% to 90% of the inventory, take 20% to 60% of the account receivables and take between 0% to 50% of the Non-Current Assets. Then deduct the Total Liabilities from what you get. If you get a negative value, then you might want to be more cautious and look critically at the company's financials or, like me, skip the company entirely.

Next in the series: The Cash Flow Statement.