There have been a few requests recently for generic guidance as to how to assess companies’ balance sheets. So, I am writing this to give an overview, hopefully supplemented as ever by community feedback in the comments section this will provide a useful resource.

Obviously, everyone comes to this with a different level of experience and understandings, so some of this may come across as teaching grannie to suck eggs, I will try to keep those parts short.

A couple of disclaimers I should add:

  1. I did not get as far through this as I had expected, so there is much more that could be said – hopefully other community members will add in the comments some of the key things they look for.
  2. I am not a qualified accountant. I believe that all of the facts (as opposed to opinions) in here are correct, but take nothing for granted. Hopefully readers will point out any errors or omissions.

Balance Sheet Basics.

 There are two sides to a balance sheet, assets and liabilities.

Liabilities

These are essentially things for which cash will have to paid out in the future.

This includes obvious things like loans, unpaid bills, future pension liabilities (usually net liabilities).

Less obviously, future lease payments; so if you rent a property at £100k per year for a contractual five year term you have a liability of £500k on the balance sheet (this may be adjusted for future rent increases etc.)

Also, potential future liabilities may be included. For example, if you are being sued for £1m and you do not know for sure if the court will find in your favour or not there will be a £1m liability (or provision) it may be less or more dependent on the potential outcomes and their likelihood.

 Equally you may have some equipment that will be expensive to decommission at the end of its life; decommissioning costs should be on the liabilities side of the balance sheet.

Or if you bought a company with additional payments due based on performance, that will be a liability until either paid or it becomes impossible for the performance criteria to be satisfied.

This is not a comprehensive list but should give a good view of the type of entries you will find within liabilities.

Assets

Assets are essentially things (or sometimes…

Unlock the rest of this article with a 14 day trial

Unlock with Email
Unlock with Google

Already have an account?
Login here