A Blanket View of Balance Sheets

Still have your company's 10-Q handy?

Hopefully, you do. (If you don't, go to the SEC's site and pull it up again because we've got more investigating to do.)

Our last story introduced the 10-Q and gave you a good idea of how to navigate it. But we're going to delve deeper into each of the three big financial statements -- balance sheet, income and cash flow statements -- and help you perform your own mini-audit.

So, without further ado, I give you ... the balance sheet.

The balance sheet is a summary of a company's financial condition at a specific point in time. So, at the end of the first quarter, the statement would be calculated as of March 31. If the company's year mirrors the calendar year, the annual report's balance sheet would be as of Dec. 31.

The balance sheet shows the company's assets, liabilities and overall net worth. Assets are the things the company possesses -- like its cash account or investments, any money it's owed and the inventory in its warehouse. A company's liabilities are what it owes to people. So if it bought items on credit, that payable balance is a liability. Same goes for any debt the company took on to buy a building or more equipment.

A company's total assets minus its total liabilities is its net worth, aka owner's equity or shareholders' equity. And that's a pretty important determinant of the value of the company.

So you can learn a lot from a balance sheet. "It gives me a breakdown of what the company is made of. It's a picture in time of the financial state of the company," says Eric Heyman, senior vice president, director of research, for the (OFAFX Quote)Olstein Financial Alert fund.

There are definitely a couple of "hot spots" on balance sheets that you shouldn't miss, but first, a big caveat: Certain line items are much more important in certain industries. For example, the inventory number is very important if you're looking at a homebuilder's stock because you can tell if the company is buying equipment, land to build on, etc. But the accounts-receivable line is more of a biggie for a company that sells a product because you want to know about any additional revenue that might be coming to the company.

To view Tracy Byrnes' video take of this column, click here