When valuing public stocks, investors typically look at four financial statements: the balance sheet, the statement of cash flows, the income statement, and footnotes. Of these, the balance sheet contains the most useful information; the other statements derive their numbers from the balance sheet. It basically lists the company’s assets (for example, cash and properties) against its liabilities (debts and losses). It also lists the shareholders’ equity, or the difference between the total assets and total liabilities.
One important difference between the balance sheet and other financial documents is that it offers snapshot information; that is, it tells you how a company is doing at one point in time, not from one point to another. That’s why it is often the first to be shown in annual reports: it helps the investor put the rest of the information into perspective.
In a balance sheet, the total of the assets is always equal to the total liabilities plus the equity. The assets tell you how much the company owns, and the liabilities (usually business credit) and equity (shareholder funds) tell you how the company came to own what it does.
The assets are usually listed first, followed by the liabilities and the equity. Current assets—those that are most liquid, or can be converted to cash within a year—are listed first. Cash itself is the most liquid asset. Further down the list are less liquid assets such as accounts receivable, which is money expected from customers, and the inventory, which are assets that must be sold (and sometimes converted into goods) before their value can be accessed. There are also long-lived assets, which usually include real estate and equipment, long-term investments, and goodwill—intangible assets with subjective value such as brand name and customer relations.
Liabilities appear in order of due date, with the most urgent ones first. Usually, these are the ones due within a year, including accounts payable and parts of larger long-term debt that are due in the given period. This can include bank loans and bonds issued.
Finally, you can see the shareholder equity, which covers four areas: retained earnings (those not used to pay dividends or buy back shares), stock at par value (the published stock price), additional capital (payments for shares exceeding the par value), and treasury stock (a negative number representing the stocks bought back by the company).
Balance sheet formats vary between industries, but most of the basic contents are the same. One thing to remember is that most of the detail is contained in the footnotes, so it’s always a good idea to read through them. It may take time, but the more experience you get, the more automatic it becomes, and you’ll be valuing stocks at a glance in no time!