Analyze Balance Sheet through Laser Eye - Part 01

 

Analyze Balance Sheet through Laser Eye

 

 

One of the main differences between the balance sheet and other financial statements is that it is created on a specific day. Generally, a business prepares a balance sheet at the end of each quarter and the end of each year. In studying that, we should be more concerned about reading an updated balance sheet. For example, if we are studying a business in the middle of the year, instead of looking at the balance sheet of the annual report issued last year, we should read the balance sheet of the quarterly report issued in the last quarter. It is simply like a snapshot of a business.

 

It mainly consists of three parts namely assets, liabilities, and equity. Liabilities are classified as current liabilities and non-current liabilities and assets are classified as current assets and non-current assets. Current liabilities mean the debt is to be settled in less than one year. which includes accounts payable, accrued expenses, and short-term debt. Non-current liabilities include loans that have to be settled in more than one year. Amounts payable to vendors, unpaid taxes, loans from banks, loans from bond issuance, etc. are included in this section. 

 

This article will discuss the assets side of the balance sheet that held by a business in detail.

 

The characteristics of the most successful businesses in the world are that their debt is less compared to their assets.

 

Assets = Equity + Liabilities

 

Short-term assets consist of cash and cash equivalents, short-term investments, and amounts due from other debtors. This is entered in the balance sheet according to the liquidity order of the assets. That is, by determining how quickly these can be converted into cash. In the past, these short-term assets were also known as floating assets.

 

The more cash and cash equivalent in a business, the better for the business. To take a detailed look at cash and cash equivalent, you need to study the balance sheet of the last six or seven years. The reason for that is that if the cash and cash equivalent showed a higher value in the selected year, you can accurately check whether it is the money received by your business from a one-time event. (such as the sale of new shares or bonds, or the sale of an asset of an existing business).

 

Inventory, Inventory refers to the bonds that are stored in anticipation of taking the business. Since the balance sheet of a business is made for a particular day, the inventory includes the amount of inventory that was on that day. One of the disadvantages of businesses in general is that their inventory expires over time. But in the businesses doing business in the manufacturing sector, since their products do not change with time, they can achieve a competitive durable advantage in this sector. This is because this section allows you to gauge whether the business is maintaining enough inventory with demand.

 

Total receivable, Once the business goods are sold to a buyer, they can be sold on credit or cash. The business allocates some portion of the goods sold on credit as bad debt and the reason for this is that the business allocates the expectation that they will not receive a certain portion of the goods sold. It is called bad debt and it is deducted from receivables and shows in the books of the business as net receivable. 

 

Net Receivable = Receivable - Bad debt

 

Although net receivables do not express a very precise statement about the long-term existence of the business, it shows how well the businesses in the same industry are doing their day-to-day activities. One trick that businesses do here is to give their customers 90,120 days instead of 30 days to pay for the borrowed goods. This will increase the sales of the business, but then the amount of bad debt of the business may also increase relatively.

 

 

Prepaid expenses, In some cases, a business makes payments in advance for the goods or services they are due to receive. For example, the payment of insurance premiums for the next year can be mentioned.  

 

Other current assets can be identified as the last part. It includes deferred income tax recoveries.