How to Read a Balance Sheet

Hello, I am Umesh Tripathi and we are learning the concepts of Fundamental Analysis. In this video we will learn about the Balance Sheet. Here we will learn what a Balance Sheet is, what are the key components of the Balance Sheet Statement, and how to read a Balance Sheet. We will learn with an example here. The Balance Sheet Statement is also called the Statement of Financial Position. So in the Balance Sheet, basically we tend to analyze liquidity, solvency and the overall capital structure. Here we analyze the information of assets. Along with this, we analyze the information of the company’s liabilities, that is, the company’s borrowings and obligations. And also we have the information on shareholders’ equity. So basically assets are equivalent to liabilities plus shareholders’ equity. Assets provide information on what the company owns. Liabilities provide information on what the company owes and equity is basically the shareholders’ or owners’ equity. So here we understand that in our Balance Sheet, basically there are three important components. The first one is the assets, the second one is the liabilities and the third one is the shareholders’ equity.

Assets are basically of two types: current assets and non-current assets. Current assets are basically resources that the company owns. So these are the assets which can be converted into cash within a year. For example, the accounts receivable or the cash lying with the particular company, or the inventory which they are going to sell in the short term in the next six–seven months — how much cash can be generated from it — its categorization is under current assets. So basically assets are the resources which the company owns. If we talk about non-current assets, then non-current assets are such assets which we can call a kind of illiquid kind of assets, that is, they are not going to be converted into cash in the next one year. For example, whatever property the company has, or whatever plant we have — our construction department, the construction unit — we are not going to sell it at least in the next one year. It is a kind of illiquid asset which comes under non-current assets. Along with this, there are certain intangible assets. For example, patents or copyrights by our employees — those come under intangible assets — and also the investments are part of non-current assets.

The second important component of the Balance Sheet is liabilities. Liabilities means obligations which the company must pay in the near short term or in the long term. As we divided assets into two parts — current assets and non-current assets — likewise our liabilities are also divided into two parts: current liabilities and non-current liabilities. The current liabilities are basically ones which are to be closed within a year, that is, they are due within one year. Whatever accounts payable are there or whatever short-term loans are

there  they come under current liabilities. If we talk about non-current liabilities, those are basically the long-term liabilities of the company. Basically long-term debts or deferred taxes — they come under non-current liabilities. Okay?

Along with this, shareholders’ equity is also a component of the Balance Sheet. Shareholders’ equity is also called net worth or book value. It is basically owners’ residual interest, that is, after the company settles all its liabilities, whatever remains from the assets after settling liabilities — that is called residual interest or shareholders’ equity. This is also called owners’ equity.

Now let us talk about how we read the Balance Sheet. So whenever we see financial statements, there is a column of the Balance Sheet there. On the Balance Sheet column we see a certain date — the date of that Balance Sheet. After checking that date, we have to basically check the structure of the Balance Sheet. So basically in any given Balance Sheet you will have information on assets, you will have information on liabilities and you will have information on the shareholders’ equity. So at any given point of time these should remain in balance, that is, assets should be equivalent to liabilities plus shareholders’ equity. This confirms that the Balance Sheet is actually balanced.

Along with this, we have to assess the liability. When we are assessing the liability in the Balance Sheet, then there we should assess the information of current assets and current liabilities. From this basically we get the current ratio. So current ratio is current assets divided by current liabilities. This is ideally greater than one, that is, at any given point of time the current assets should be more than the current liabilities of the company. It basically shows that the company is financially stable. Okay?

Along with this, in the Balance Sheet we also have to assess the overall leverage, that is, the debt-to-equity ratio. So here we are getting the information of debt from the Balance Sheet. We have the information of equity, right? So we can easily calculate the debt-to-equity ratio here. At any given point of time, if we divide debt by equity, then we get the information of leverage. If debt to equity is more than one, it means debt is higher here. We are getting a high ratio, and a high ratio is equivalent to high risk. Okay?

Along with this, we also have to check asset composition. Whenever you are analyzing the Balance Sheet or reading the Balance Sheet, under asset composition we get to know about the company’s overall cash, we get to know about receivables, we get to know about their inventories and fixed assets. Under the shareholders’ equity section, whatever information of share capital and information of retained earnings there is — that also we need to observe carefully. Okay?

Here let us see an example — example of a Balance Sheet. Here there is a certain company, Company ABC, whose Balance Sheet date is 26 May 2025. Here you are seeing two columns: the column of assets and the column of liabilities and equity. So basically liabilities and equity are kept in one column here. Assets are kept in one column. If we look carefully here, there are actually three parts — assets, liabilities and equity. At any given point of time assets should be equivalent to liabilities plus equity. That is what is called a Balance Sheet. So here you should note at the bottom the total assets are ₹450 crore. Total liabilities and equity here are ₹450 crore.

Now note that under current assets there is cash of ₹50 crore, inventory of ₹100 crore, and their accounts receivable are ₹80 crore. In non-current assets, property, plant and equipment are ₹200 crore. Intangible assets are ₹20 crore. Total assets here are calculated as ₹450 crore.

Now if we talk about liabilities, in liabilities also there are current liabilities and non-current liabilities. Here accounts payable are ₹40 crore. Short-term loan here is ₹30 crore. Under non-current liabilities, the long-term loan they have taken is ₹150 crore. So if we add liabilities with equity, then we will get the figure equivalent to total assets, that is, we will get ₹450 crore. So here if we see in equity, the share capital is ₹100 crore and their retained earnings are ₹130 crore. So if we add liabilities and equity here, then we are getting ₹450 crore which is nothing but equivalent to the assets. Okay?

So the Balance Sheet basically provides us a clear picture of the company’s financial standings. It helps in making informed investment decisions and also helps us in analyzing the company’s solvency risk and overall financial performance. So that is all in this video.