Why is it important to understand the Balance Sheet and financial position?

If you are an investor or a business owner, understanding the balance is a crucial tool that helps you make informed financial decisions. The financial statement called the “Balance Sheet” provides an overview of the company’s financial health at a specific point in time, allowing you to analyze strengths, weaknesses, and compare with other companies in the industry.

What is a Balance Sheet? Its role in financial decision-making

Balance Sheet ( or Statement of Financial Position ) is a document that shows how much resources the company owns (assets) and where they come from (liabilities + equity) at a given point in time. Its meaning lies in balance—the two sides of the equation must always be equal according to fundamental principles.

The equation used is: Assets = Liabilities + Equity

This equation is the core of accounting because it shows that all resources of the business come from two sources of funding—creditors (liabilities) and owners (equity).

Main components of the balance sheet to understand

1. Assets ( - Resources owned by the company

Assets are divided into 2 categories based on convertibility to cash:

Current Assets include cash, trade receivables, inventory, and other assets that can be converted to cash within 12 months. These are vital for daily operations.

Non-current Assets include land, buildings, machinery, long-term investments, patents, and copyrights. These assets have low liquidity and are used for long-term operations.

) 2. Liabilities ### - Obligations to be paid

Liabilities are what the company owes to external parties or entities, divided into 2 types:

Current Liabilities include trade payables, taxes payable, and other debts due within one year. These are short-term obligations with urgency.

Non-current Liabilities include long-term bank loans, long-term bonds, and other obligations payable over more than 1 year.

( 3. Equity ) - Owner’s share

Equity is the net assets = total assets - total liabilities. It consists of capital invested by shareholders and retained earnings from past operations.

Two main formats for preparing a balance sheet

T-Form Balance Sheet ### shows assets on the left and liabilities + equity on the right, forming a T shape that is easy to read.

Report Format Balance Sheet lists items in order—assets first, then liabilities, and equity. Suitable for detailed financial reports.

Why is it called “Statement of Financial Position”?

Originally, the name “Balance Sheet” only indicated that the document is balanced on both sides but did not specify its purpose. The international accounting standard (IFRS) changed the name to “Statement of Financial Position” to reflect that this document clearly shows the company’s financial standing. Thailand has adopted this change, calling it “งบแสดงฐานะทางการเงิน” (Statement of Financial Position).

How is the balance sheet useful to users?

For management: Helps in financial planning, investment decisions, and monitoring financial stability.

For investors: Assists in assessing whether the company is financially stable and whether to invest.

For creditors: Helps evaluate the risk of lending by analyzing the asset and liability structure.

( Analyze liquidity

Compare the ratio of current assets to current liabilities to assess if the company can meet short-term debts.

) Analyze profitability ability

If retained earnings are part of equity, it indicates the company has generated profits over several years. Conversely, accumulated losses may signal operational issues.

( Analyze debt-paying ability

Look at the ratio of total debt to assets )Total Debt to Assets### to gauge overall financial risk.

How to view the balance sheet of a company of interest

Many investors can access the balance sheet at Datawarehouse.dbd.go.th, an official data source in Thailand.

Steps to find:

1. Visit Datawarehouse.dbd.go.th
2. Select “Corporate Data and Financial Statements”
3. Search for the desired company name
4. Open the “Financial Data” tab
5. View the balance sheet, income statement, financial ratios, and compare across years

How to read a balance sheet for understanding

Start by familiarizing yourself

Before analyzing the numbers, understand that the balance sheet shows data only at a specific point in time, not throughout the year.

Understand the 3 main sections

Left side (Assets) shows what the company owns; right side ###Liabilities + Equity### shows where the money comes from.

( Compare across different periods

Review balance sheets from 2-3 years back to track trends, such as increases or decreases in assets and changes in liabilities.

Cautions when reading a balance sheet

Historical data, not current

The balance sheet is a snapshot of the financial position at the date prepared. If significant events occur after that date, the balance sheet may not reflect the current reality.

Possible manipulations

Sometimes, companies may distort figures to make their financial position look better than it actually is. Always verify with audit reports and other information.

Economic context matters

Inflation, interest rate volatility, or currency depreciation can significantly affect the figures in the balance sheet without reflecting operational performance.

Summary

A balance sheet is a fundamental financial document that forms the basis for financial analysis, showing the balance between assets, liabilities, and equity. Understanding how to read and analyze it will help you make informed investment decisions and accurately assess risks.

However, a balance sheet alone is not enough. It should be studied together with the income statement, cash flow statement, and other data to get a comprehensive picture of the financial health of the company of interest.