Reading a Balance Sheet

1. Look at shareholders' funds. The balance sheet is set out showing the liabilities deducted from the assets. The amount left over, provided that the company is solvent, is the value that the owners have invested in it.

2. Look at net current assets. Current assets are likely to be owned for less than a year or realisable in less than a year.

3. Look at the current liabilities.

4. Consider the figure for net current assets. This is current assets less current liabilities. It is a very important figure.

5. Examine the fixed assets. Assets are items owned by the company, expressed in financial terms. 'Fixed assets' are those items of long-term value to a business and appear at the top of the balance sheet.

6. Consider the accounting policies.

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Dos and don'ts for reading a balance sheet:

Do:

Remember that it is essential to read the notes and study the accounting policies.

Remember that it is useful to study carefully selected ratios and that it is useful to compare balance sheets as at different dates.

Remember to study the balance sheet in conjunction with the other financial statements and reports. It is important to see the complete picture.

Don't:

Forget that the assets are 'book values' and not necessarily what would actually be obtained in the event of a sale.

Forget that a balance sheet is a snapshot on one particular one day, and that it is out of date by the time it appears.