Balance Sheet Basics: Assets, Liabilities and Shareholders' Equity

The balance sheet is a snapshot of a company's financial position on a specific date. It follows one simple equation:

Assets = Liabilities + Shareholders' equity

Assets

• Current assets: cash, short-term investments, accounts receivable and inventory — things expected to turn into cash within a year.
• Long-term assets: property and equipment, intangible assets, goodwill and long-term investments.

Liabilities

• Current liabilities: accounts payable, short-term debt and other obligations due within a year.
• Long-term liabilities: long-term debt, lease obligations and pension liabilities.

Shareholders' Equity

What's left for owners after liabilities: paid-in capital plus retained earnings, minus treasury stock from buybacks.

Key Ratios

• Current ratio: current assets ÷ current liabilities. Above 1 suggests the company can cover short-term obligations.
• Debt-to-equity: total debt ÷ equity.
• Net cash or net debt: cash minus total debt.

Red Flags

Rising debt without rising earnings, receivables or inventory growing much faster than sales, and large goodwill from expensive acquisitions. Combine the balance sheet with the income statement and cash flow for the full picture.