The Fool School

Meet the Balance Sheet

Our friend the balance sheet is essentially a snapshot of a company's financial condition at a single point in time (often the end of a fiscal quarter). For Your own personal balance sheet, you'd list all your assets, subtract your debts and obligations, and end up with your net worth. Companies essentially do the same thing, and Fools can gain valuable insights into a firm's financial strength by studying this document.

The balance sheet has three main parts: assets, liabilities and shareholder equity. Assets are set equal to - or balance - liabilities and shareholder equity. The funny thing is, though, some assets can be bad and some liabilities can be good. Here's why.

Take a gander at assets. In this category, you'll find items such as "cash and cash equivalents" and "short-term investments." That's how much unused gunpowder the company has. These assets are good, but most other assets are not as good. Consider "accounts receivable." That's money from sales the company hasn't yet received and can't use yet. "Inventory" reports how much product is in various stages of preparation. It's cash tied up in materials that haven't yet been sold. Not so good. Other balance sheet assets may include investments, "prepaid expenses" (items like insurance that are paid ahead of time), and "property, plant and equipment."

Liabilities are short-term (also called "current") debt and long-term debt. Debt is not necessarily a bad thing, although we don't like to see much long-term debt. In a sense, debt can be considered an asset, as it often represents cash that the company is putting to work. "Accounts payable," essentially short-term debt, represents invoices not yet paid. These can also be a good thing. They often reflect a company delaying payment until it's due and using the money in the interim.

Finally, shareholder equity is the portion of the company that stock holders can claim. Simply put, it's the difference between assets and liabilities.......