Balance sheets are useful to investors because they show how much a company is actually worth. Some of the information on a balance sheet is useful simply in and of itself. For example, you can check things like the value of the company’s assets and how much debt a company has. You can even dig a little deeper to see what percentage of a company’s assets are tangible objects like machines and vehicles.

Few are:

SHAREHOLDERS EQUITY - Shareholders’ equity is the money that goes to a company’s owners or shareholders. You can calculate it simply by subtracting liabilities from total assets. That means shareholders’ equity is also the company’s net income, net worth and overall value. This is an important number to investors because you can see the company’s worth. More equity also means more money for shareholders. If a company has negative equity, that means the value of its assets is not enough to cover all its liabilities. This is a common situation with new companies and startups. However, a company with a negative shareholders’ equity is riskier to invest in than a company with a positive equity value.

RETAINED EARNINGS - Shareholders’ equity tells you how much a company has left after covering its liabilities. If it wanted to, the company could then pay out all of that money to its shareholders. This happens in the form of dividends. However, it’s more likely that the company reinvests the money into the company. The money that the company keeps is its retained earnings. Even if a company does pay dividends to shareholders, it may still retain some money.

SHARE CAPITAL - This is the value of what investors have invested in the company. For example, let’s say you start a company and someone invests $100,000 to help you start your company. On a balance sheet, you would count that $100,000 with your cash assets and you would also count it as part of your share capital.

DEBT TO EQUITY RATIO - The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity.

WORKING CAPITAL= current assets – current liabilities. This is the capital a company has to use in its day-to-day trading operations

QUICK RATIO= (cash and equivalents + marketable securities + accounts receivable) ÷ current liabilities. Also known as the acid-test or the liquidity ratio, this is a measurement of a company’s ability to cover its short-term liabilities. A ratio greater than one indicates that the company has enough in cash and cash equivalents to pay its obligations and cover its operations.

CASH AND EQUIVALENTS - These are the most liquid assets and appear first in the list on the balance sheet. Cash equivalents are assets that the company can liquidate on short notice – less than one year. Maybe that’s a U.S. Treasury bill, certificate of deposit (CD) or similar short-term investment

GOODWILL - Goodwill is an asset that comes when one company purchases another. In particular, goodwill appears when one company purchases another at a price that’s higher than the value of all that company’s tangible assets.

INTANGIBLE ASSETS - Intellectual property includes things like patents, licenses, copyrights, trademarks and customer lists.

LONG TERM ASSETS - Long-term assets are those assets that cannot be easily liquidated or sold. They often represent long-term capital investments that a company has made in its future – everything from factories to patents to investments in other companies.

SUMMARY

A balance sheet is a document that businesses can use to summarize their company’s financials, and which investors can then use to determine the value of a company. It details a company’s assets and liabilities, along with the value of its stock. The information on a balance sheet is independently useful too. You can also use them in conjunction with other financial documents, like an income statement or a cash flow statement. Combining the insights of all three of these documents can help you determine whether investing in a company is the right choice for you.