How to read a balance sheet

Knowing how to read a balance sheet is essential to making wise investment decisions, as well as knowing the financial stability of companies.

So what should a balance sheet tell you?
The balance sheet shows what a company owns and what it owes; if you use these two numbers, the difference shows you what the company is worth. A balance sheet is also known as a "statement of financial position", as it reveals a company's assets, liabilities and owners' equity (net worth). One thing to realize though is often this is not entirely accurate, as reality and what the paper says can have some discrepancies.

How to read a balance sheet

How to read a balance sheet and understand it. A balance sheet is like the holy grail of finances. The best way to read this ever so important document is with the trained eye of a person who is aware of what the document is about. There are several important sections of a balance sheet that are important to the business involved. Therefore, it is necessary to know what all those sections are.

In addition to the different sections, you need to be aware of the vocabulary involved. So lets start with some of the vocabulary you will find in balance sheets almost cryptic details.

Assets: The assets a company or individual has that could be converted easily to cash. This would be cash, securities, accounts receivables, inventory, office equipment, real estate, vehicles, or properties. Some of these assets are either easily converted into cash, and some are long term assets that take more time to turn to cash.

Liquid Assets: These are the assets that can be easily converted into cash. These are short term assets.