A balance sheet is a key component of financial statement analysis. It provides a snapshot of a company's financial position at a given time by listing its assets, liabilities, and shareholders' equity. It includes both current and long-lived assets and current and long-term liabilities.
Assets reflect what the company owns, such as cash, inventory, and real estate, whereas liabilities represent what the company owes, including debts like loans and accounts payable.
Balance sheet analysis is based on the accounting equation, where assets must equal the sum of liabilities and shareholders' equity. This equation helps analysts understand whether the company's assets are financed through debt or equity and reveals the amount shareholders have invested, known as shareholders' equity.
Analyzing the balance sheet is essential for evaluating a company's financial health, liquidity, and stability. It indicates the company's ability to meet its short- and long-term obligations, manage risk, and maintain operational efficiency. Stakeholders use this analysis to assess the business's risk profile, evaluate its ability to obtain capital, and benchmark performance against competitors, making it a critical tool in financial statement analysis.
