There are three financial statements you should know about: an income statement, a balance sheet and a cash flow statement.
The income statement shows a company’s profit or loss for a given period, so its performance over some past amount of time. The cash flow statement shows how much cash came in and out the door in some past period as well.
A company’s balance sheet shows what it currently owns and what it currently owes other parties. But the balance sheet is an “as of ‘x’ date” statement. What does this company have right now? And what is it scheduled to give up?
The balance sheet, an important piece to understanding a company’s fundamentals, can often be overlooked. However, in extenuating circumstances, like the coronavirus-induced recession, investors all of a sudden zero in on a company’s balance sheet.
What the company owns is its assets and what it owes is its liabilities.
Short-term assets include cash, receivables, and inventory. These are either already cash or will turn into cash within less than a year.
Short-term liabilities include payables, short-term debt, taxes payable, and dividends payable. These are all liabilities due in less than a year.
Investors and analysts usually have their eye on how much cash and short-term assets a company has relative to its liabilities. Companies that entered the virus with a low ratio of cash to short-term liabilities and maybe some debt due soon have had a bit of an issue and have had to raise capital to stay afloat until states reopen and revenue returns.
Long-term assets include property plant and equipment (PP&E), real-estate, patents, and stocks. These are assets that can bring value past one year out.
Long-term liabilities include long-term debt, leases, and pension obligations. These are liabilities due in over a year.
Finally, it’s sometimes useful to subtract all liabilities from all assets. That equals shareholders’ equity, or the residual value of the assets, claimed by the shareholders. Do not confuse this with the market value of the company’s equity, which is the perceived value of profits the company can generate into the future.
To see how this applies to bankruptcies and events in markets this year, watch the quick video above.
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