Analyzing a company’s financial health is of utmost importance to entrepreneurs, investors and analysts alike. At the heart of this financial insight lies the balance sheet: a fundamental component of a company’s financial statements. The balance sheet of companies provides a snapshot of assets, liabilities, and shareholders’ equity at a specific point in time, serving as a crucial tool for informed decision-making.
Having the ability to study a consolidated balance sheet is critical for evaluating the financials of private companies and making informed decisions. In this blog, we will delve into the nuances of the balance sheet, explore its key components, significance, and ways for effective analysis.
Understanding Balance Sheets
A balance sheet is a summary of the company’s financials, such as its assets, liabilities, and shareholders’ equity at a specific point in time. It is a vital addition to the other financial statements, including the income statement and cash flow statement, giving investors a holistic view of a company’s financial status.
Analysing the balance sheet is important because it verifies the integrity of the financial statements and facilitates verification of the company’s financials appropriately. If the equation does not balance, there are errors in the accounting process, including missing entries or misallocations. At the core of the balance sheet lies the fundamental accounting equation:
Assets = Liabilities + Shareholders’ Equity
This equation ensures that the balance sheet remains balanced, reflecting the principle that a company’s resources (assets) are financed either by borrowing (liabilities) or by the owners’ investments (shareholders’ equity).
Real-World Example:
Consider a scenario where you purchase a house worth ₹50 lakhs. You pay ₹20 lakhs from your savings and take a loan of ₹30 lakhs. Here, the house (asset) is worth ₹50 lakhs, financed by ₹30 lakhs in liabilities (loan) and ₹20 lakhs in equity (your savings). This mirrors the balance sheet equation, ensuring that assets equal the sum of liabilities and equity.
Key Components of Balance Sheets
1. Assets:
The holdings that a company owns or controls are referred to as its assets. Current holdings are intended to be either sold within one year’s time or used within that same timespan, consisting of ready cash, accounts receivable, and stock on hand. Non-current holdings encompass long-term assets such as land, factories, machines, and investments that offer long-term returns.
2. Liabilities:
Liabilities are obligations the company owes to external parties. Current liabilities are essentially the liabilities that need to be met within one year, including accounts payable, short-term loans, and accrued expenses. Non-current liabilities refer to long-term obligations like long-term loans, bonds payable, and deferred tax liabilities.
3. Shareholders’ Equity:
This element represents the portion of the company that is owned by its investors after liabilities have been deducted from assets. Reserves signify profits which have been set aside for potential future needs of the business. Retained Earnings indicate the part of net revenue not distributed as dividends but instead reinvested into sustaining and expanding company operations.
Reading & Analysing a Balance Sheet: Step-by-Step
1. Check Liquidity:
The first step to analysing the balance sheet is to assess the company’s short-term solvency by examining liquidity ratios like current and quick ratios that indicate how adequately current or liquid assets pay short-term liabilities.
2. Assess Solvency:
Establish the overall financial viability of the company by comparing how much of the company is financed by debt with how much is financed through the owners’ investment.
3. Analyse Capital Structure:
Look at the company’s balance between debt and equity financing, along with trends in retained earnings, to understand how it funds operations and distributes profits.
4. Spot Trends in Multi-Year Balance Sheets:
Examine the balance sheet over several years to see if there are clear trends of consistent growth, stability or financial distress that would point to the company’s overall trajectory and durability.
Where to Access a Company’s Balance Sheet in India
1. Ministry of Corporate Affairs (MCA) Filings:
The Ministry of Corporate Affairs (MCA) keeps a storehouse of government filings of the company financial statements in India. One can get the balance sheet of companies via the MCA portal by entering the name or Corporate Identification Number (CIN).
2. Audited Financial Statements & Annual Reports:
Audited financial statements and annual reports are frequently available on a company’s website or can be obtained at the request of stakeholders. These are key documents that provide insight into various aspects of the company’s financial health, such as the consolidated balance sheet, and stakeholders use such documents to get a snapshot of the business.
3. New-age Business Intelligence Tools:
Platforms like Probe42 offer more extensive data on Indian companies with quicker access to this data. These tools are designed to offer deeper insights into company financial statements such as balance sheets and profit-and-loss statements, and can also be useful to facilitate cash flow statement analysis.
By analysing assets, liabilities, and shareholders’ equity, stakeholders can make informed decisions regarding investments, credit, and strategic planning. Regular financial statement analysis, including the use of tools like Probe42, enhances transparency.
For a deeper dive into company financial statements and to check company financials, consider exploring Probe42, a comprehensive financial statement analysis tool that provides detailed insights into the financials of private companies in India.
Probe42 – A New-age Business Data Intelligence Tool
Probe42 is a business data intelligence platform that facilitates access to information on over 2.3 million registered companies in India. Drawing from more than 720 validated public domain sources, the platform aggregates and updates corporate data regularly. This information is then processed through refined algorithms and verified by quality assurance specialists to ensure its accuracy and reliability.
A core functionality of Probe42 is its streamlined access to company financials, including balance sheets, profit and loss accounts, and cash flow statements. The platform enables professionals to retrieve structured financial data efficiently, supporting due diligence, market research, and informed decision-making.
For more information, visit: https://probe42.in/
Frequently Asked Questions (FAQs)
1. What is included in a company’s balance sheet?
A balance sheet includes a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It helps assess financial health and capital structure.
2. How can I access a private company’s balance sheet in India?
You can access private company balance sheets through the Ministry of Corporate Affairs (MCA) portal, annual reports, or tools like Probe42.
3. Why is balance sheet analysis important for investors and lenders?
It helps evaluate a company’s liquidity, solvency, and overall financial position, making it essential for investment and credit-related decisions.
