Shareholders pay attention: Douglas Battista, a California-based business management expert, answers a few common questions regarding balance sheets and why you should learn to read them.
Q: What is a balance sheet?
Douglas Battista: A balance sheet is a statement that outlines a company’s financial position. It consists of the company’s assets and liabilities. The balance sheet is one of many important pieces of information needed to assess the value of a company.
Q: How are “current assets” defined?
Douglas Battista: The term “current assets” refers to those resources which can be converted to cash with little delay. This could be bank accounts or accounts receivable – money owed to the company by clients. A company’s inventory is also considered a current asset.
Q: Do these differ from “noncurrent assets?”
Douglas Battista: Yes. Noncurrent assets are those that cannot be quickly liquidated into cash. Real estate, computer equipment, machinery, and copyrights are examples of noncurrent assets. It’s important as an investor to have a full understanding of all assets as well as liabilities. Resources, such as a company’s brand/reputation, are often overlooked as assets but should not be underestimated.
Q: Why should I, as an investor, understand assets, liabilities, and balance sheets?
Douglas Battista: You will ideally know these things before making a financial commitment to the company. It is also a good idea to stay on top of this information as numbers change throughout the year. This will give you a better idea of how effectively your money has been used. A company that is making a profit will have a balance sheet that reflects favorably toward the assets side. Adversely, a poorly-managed corporation will likely have more liabilities than assets. In addition to the balance sheet, you can use the company’s cash flow and income statements to make an informed decision on whether or not it remains a viable investment.