By Analyzing A Company’s Balance Sheet We Can Understand Whether The Company Can Pay Of Its Debts, If There Any. We Can Also Understand Liquidity Condition Means, Does The Company Have Enough Liquidity To Manage The Short Term Expenses.
For Example, If There Is Any Uncertain Events Like Corona, Can The Company Meet Up To Their Short Term Expenses.
Balance Sheet = Total Assets Of The Company – Total Liabilities.
Assets Mean The Property Of The Company Like Buildings, Inventory Or Machinery Or Any Other Which Company Owns.
Liabilities Means, Which Company Doesn’t Own, Like Debt Of the Company, Equity Also Comes Under Liability.
So By Analyzing A Balance Sheet We Can Understand The Financial Strength Of The Company And The Value Of The Company.
Do Note Balance Sheet Is Not Only For The Year Or Quarter, Balance Sheet Is From The Starting of The Company To The Current Year.
Let us Understand the Balance Sheet And Every Term In the Balance sheet With an Example.
Balance Sheet Analysis
As We Learnt Already Balance Consists Of Assets And Liabilities. In These Assets And Liabilities There Are Different Types, So let’s Understand One By One In Detail By Taking The Example Of Reliance Industries Balance Sheet.
Let’s First Understand About Liabilities.
Equity And Liabilities In Balance Sheet
Most Of The People are Confused About Why Equity Comes Under Liabilities. Company And Promoters Are Two Different Things. Company Needs To Give Back The Money Which Is Invested By Promoters. So Either The Money Raised From Debt Or Equity The Company Needs To Give The Money Back. So Both Debt And Equity Come Under Liabilities.
Equity Share Capital
Equity Share Capital = Face Value X No Of Shares.
Reliance Face Value Is 10, No Of Shares = Equity Share Capital / Face Value.
You Might Thing That Reliance Is Trading Above 2000, But Why do We Need To Take The Face Value Of 10, Face Is Value Is Taken Just For The Company Accounting Process. But It Is Trading At Premium Because Of The Brand, Business, Growth Of The Company And Demand And Supply.
So The Original Total Equity Of The Reliance Is Only 6445 Crores.
Other Equity Means, How Much Premium The Shares Are Trading At, As We Saw In Equity Share Capital That The Company Face Value Is 10 But The Company Is Trading Above 2000rs, So The Remaining Amount Of The share Price Is Consider As Other Equity.
For Example, If Reliance Is Trading At 2000Rs, The Face Is 10, So Equity Share Capital Means No Of Shares Multiplies By Face Value, This Is The Original Equity Of The Company.
But It Is Trading At 2000Rs Because OF The Brand, Business, Growth, Demand, And Supply Of The Company. The Other 1990Rs Is Premium.
So, Other Equity Means 1990Rs X No Of Shares.
Liabilities Are Two Types. Current Liabilities And Non-Current Liabilities.
For Example, If You Bought A Mobile Through EMI, So You Need To Pay Some Amount Every Month, Which Is A Liability. Mobile EMI’s Are Mostly 6 Months Or One Year, So It Is Called As Current Liability. We Call It As Current Liability If it is Within A Year.
If You Bought A House Through EMI, You Need To Pay Some Amount Every Month, Which Is A Liability. House EMI’s Are About 10 Years Or 20 Years, It Is Called As Non-Current Liability. If The Duration Is More Than A Year It Is NON-Current Liability.
Borrowings Means The Long Term Loans Of The Company Borrowed From Banks.
In The Above image, Other Than Borrowings There Is A Number 15, For Every Term There Is A Number. What This Number Means, There Will Be A Notes Section In The Financial Report. So If You Go Through The Notes. The Notes Will Have Numbers And Details Regarding That Particular Number. So If You Go Through Number 15 In Notes. It Will Consists Of Details Regarding The Borrowings Of The Company.
For Example, If You Want To Know The Details Of Their Borrowings Like Interest Rate. Go To The Notes Section And In That Go To 15 Number, There You Will Find All Details Regarding The Borrowings.
Other Financial Liabilities
Other Than Loans, Like Security Deposits And Other Small Things, Comes Under Other Financial Liabilities.
Provisions Means, The Company May Think That In Future There Will Some Expenses, So For That Expenses The Company Will Put Some Money Aside Like For Example For The Products Of The Company There Will Be Manufacturing Warranty, So If The Product Fails Within In The Warranty Period They Need To Replace It For Free. For That Expenses The Company Will Keep Some Money Aside As Provisions.
Provisions Are Both In Non-current And Current Liabilities, The Provisions In Non-Current Means The Company May Think That There Will Be Some Expenses After An Year, So They Will Keep Some Amount Aside. Current Provisions Means The Company Keeps Some Money Aside For The Expenses Within The One Year.
Deferred Tax Liabilities
Deferred Tax Liabilities Means The Amount That Company Needs To Pay As Taxes To The Government.
Other Long Term Liabilities
Other Long Term Liabilities Include The Pension That Company Need To Pay For Its Employees Or The Money Borrowed From Its Subsidiaries.
Current Liabilities Also Same As Non-Current Liabilities, But The Only Difference Is In Current Liabilities They Need To Pay With In A Year And Non-Current Liabilities More A Year.
So We Learned About Provisions, Borrowings, Other Financial Liabilities And Other Non-Current Liabilities Above In Non-Current Liabilities.
Here The Only New Term Is Trade Payables Due To.
Trade Payables Means, Reliance Has Other Companies Like Reliance JIO, Reliance Retail. For Example If Reliance Retail Bought Some Cloths From Any Other Micro Enterprises. They Will Not Pay The Amount Immediately, They Will Have An Agreement To Pay Within 60 Days Or 90 Days.
So This Will Come Under Trade Payable Dues. Reliance Has Mentioned As Small Enterprises And Micro Enterprises, But Other Companies May Or May Not Mention Like This.
Assets In Balance Sheet
In Assets Also There Will Be Two Types As Current-Assets And Non-Current Assets. Current Assets Means Which Company Can Convert Them Into Cash Within a Year. Non-Current Assets Means Which Company Cannot Convert Them Into Cash Within A Year.
Non Current Assets
Property, Plant And Equipment
We Can Understand This By Reading The Name Property, Plant And Equipment. Properties Of The Company, Plants Of The Company And Equipment Of The Company This All Are Assets Of The Company. Because The Company Owns All These Properties, Plant And Equipment.
This Comes Under Non-Current Because The Company Cannot Able To Convert Them Into Cash Within A Year. As They Are Very Expense Or Costly, If They Want To Sell To Make Money Also It Is Not That Easy. There Will Be a Lot Of Meetings And Agreements To Convert Them Into Cash. So It Will Take More Than A Year, That’s Why They Are Under Non-Current Assets.
Capital Work In-Progress
If They Are Building Any New Plants, They Have Already Invested Money For the Construction Of The Plant, But The Plant Construction Is Still In Progress. So These Type Of Assets Will Come Under Capital Work In Progress.
After The Completion Of Construction. It Will be Considered Under Property, Plant And Equipment.
Assets Are Two Types Tangible Assets And Intangible Assets. Tangible Assets Means The Assets Which We Can See Or Touch Or Feel Like Cars Or Property Or Plants Or Equipment All These Comes Under Tangible Assets.
Intangible Assets Means For Example Patents. We Can’t Touch, See Or Feel The Patents. But Patents Are Considered As Assets Of A Company. Because Companies Also Earn From Patents.
Intangible Assets Under Development
Intangible Assets Which Are Under Development Stage Comes Under Intangible Assets Under Development. The Company has Already Invested Some Money And It Is Still Under The Development Stage.
By The Name, We Can Understand, The Investments Of The Company.
Loans Means, The Company Gives Loans To Its Subsidiary Companies Or Promoter Or For Its Employees. This Will Comes Under Loans.
Other Non-Current Assets
Other Non-Current Assets Include Security Deposits Collected By The Company Or Other Small Small Assets Are Considered As Other Non-Current Assets.
Inventories Means, For Example, Consider Reliance Retail. Reliance Retail Will Have Retail Products In Their Stores For Sale. And Reliance Also Sells Cloths, All This Are Already In Their Stores For Sale. All These Comes Under Inventories.
The Investments By The Company For A Period Of Within A Year.
Loans Given By The Company To Its Subsidiaries, Promoters Or Employees With A Time Frame Of Less Than A Year.
As We Already Discussed In The Liabilities About Trade Payables. Trade Receivables Are Opposite Of Thet.
For Example, Reliance Sold Its Products For Some Other Company And The Company Will Not Pay The Amount Immediately, They Wil Have An Agreement Like To Pay With 45 Or 90 Or 120 Days. So These Will Come Under Trade Receivables.
Cash And Equivalents
The Amount Of Cash The Company Has And The Amount Invested In Mutual Funds Comes Under Cash And Cash Equivalents.
Other Current Assets
Other Current Assets Means Which Are Not Mentioned Above By the Company Or Other Small Small Assets Considered As Other Current Assets.
This Is All About the Balance Sheet. By Analyzing A Balance Sheet You Can Understand How Strong a Company Is. If You Still Have Any Doubts Please Feel Free To Leave A Comment And Let Us Know.