#challenge #day2

BALANCE SHEET

In my post, I will try to relate these terms to the real world. whatever definition is written there, will help you in analysis and financial modeling. I am trying to make it in simple language. So I hope you will read my full post.

Balance sheet :- agr aj hi dhande ko band karna pada to kitna paisa hath m ayega or kitna jayega" in marwadi langage. it is a financial statement, that provides a snapshot of a company's financial position.

Components of balance sheet

Assets = liability + equity        

Assets:- There are two types of assets, current and non-current. if the asset is easy to convert into cash within one year then it's a current asset. if it takes more than 1 year then it's non-current assets. let's understand by example

1. current assets:- Examples cash, accounts receivable, inventory, short-term investments, prepaid expenses, and marketable securities.

2. Non-current assets:- Examples of non-current assets include property, plant, and equipment (PP&E), intangible assets, long-term investments, and long-term receivables.

Liability:- There are the same types of liability mentioned above current and non-current.

1. Current liability:- These are obligations that must settled within a year, including accounts payable and short-term debt.
2. Non-current Liability:- These are long-term obligations like long - term long or bonds.

Equity:- Equity represents the owner's shareholder's residual interest in the company's assets after deducting liabilities. It includes items like Common Stock, retained earnings, and additional paid-in capital.

Analysis of the balance sheet

Financial analysts and stakeholders use the balance sheet to perform a comprehensive assessment of a company's financial health and stability.

1. Liquidity assessment:- Analysts often focus on current assets and current liabilities to calculate ratios like quick ratio and current ratio. These ratios gauge whether the company has enough assets that can quickly converted to cash to cover its short-term debt.
2. financial stability: The analyst examines the trends of the company's assets, liabilities, and equity over time to identify any unusual fluctuations. A consistent and well-structured balance sheet demonstrates financial stability and responsible management.
3. working capital management:- The balance sheet provides how efficiency a company manages its working capital. Effective working capital management ensures that the company can maintain daily operations. Analysts monitor the level of working capital and assess whether it is sufficient to support business activities.
4. Growth potential:- Investors and stakeholders also use the balance sheet to assess a coampany's growth potential. A healthy balance sheet with adequate equity can be a sign that the company is well-positioned to fund future expansion and investments.
5. Benchmarking:- Analysts often compare a company's balance sheet to those of its peers or industry standards. This benchmarking helps assess whether a company is in line with its industry norms or if it has specific strengths and weaknesses.
6. Solvency evaluation:- Analysts use the balance sheet to assess a company's long-term financial viability. They look at non-current liabilities and equity to calculate ratios like the debt-to-equity ratio. This ratio helps determine how much of the company's assets are financed through debt, which can be critical for making investment decisions.
7. Red flag:- Lastly, analysts Scrutinize the balance sheet for any red flags, such as excessive debt, declining equity, or irregularities in asset valuation. These red flags can indicate financial distress and potential accounting issues.

The balance sheet offers a point-in-time view of a Company's financial health, allowing, investors and stakeholders to assess liquidity, solvency, and financial stability.