Understand the Balance Sheet (Balance Sheet) in investor-friendly language

If you are an investor, executive, or someone wanting to understand a company’s financial health, the first thing to learn is balance sheet — an essential document that tells the story of a company’s wealth or lack thereof, including assets, liabilities, and the true value of the owner’s equity.

What is a Balance Sheet? Why is it one of the three main financial statements?

A balance sheet is a financial statement designed to show all assets, liabilities, and the true value of the owner at a specific point in time. It’s like a snapshot of the company’s financial health at the moment the picture is taken.

Originally in Thailand and abroad, this document was called “Balance Sheet” because it emphasizes that both sides of the equation must balance. However, with updates to international accounting standards, it was renamed “Statement of Financial Position” to better reflect its purpose.

The Basic Equation: Why Must the Balance Sheet “Balance”?

Understanding balance sheet means understanding the fundamental accounting equation:

Assets = Liabilities + Equity

This equation shows that:

• Assets: All resources owned and used by the company to operate
• Liabilities: Money and obligations owed to others
• Equity: The true value remaining after debts are deducted, belonging to the owners

The most important thing is that both sides must always be equal. If they are not, it indicates an error in recording.

The Three Main Components Investors Should Study Deeply

1. Assets – Understand the Types

Assets are resources that generate income or are used in normal operations. They are divided into two main categories:

Current Assets – Resources that can be converted into cash within a year:

• Cash and cash equivalents
• Accounts receivable (money owed by customers)
• Inventory
• Prepaid expenses
• Short-term tax assets

Non-Current Assets – Resources that cannot be converted into cash within a year:

• Factories, buildings, land
• Machinery and equipment
• Vehicles
• Long-term investments
• Patents, copyrights, franchises
• Other intangible assets

2. Liabilities – Money the company must repay

Liabilities are obligations that the business must pay to external parties. They are divided into:

Current Liabilities – Due within a year:

• Accounts payable (creditors)
• Short-term bank loans
• Taxes payable
• Portion of long-term debt due within the year

Non-current Liabilities – Due after more than a year:

• Long-term bank loans
• Long-term bonds issued to investors
• Other obligations payable after this year

3. Owner’s Equity – The true value of the company

Owner’s equity is the true value of the company after deducting all debts. It consists of:

• Share capital: Money invested by shareholders
• Retained earnings: Profits from operations not paid out as dividends; if the company has losses, it shows as accumulated deficit

Two Types of Balance Sheet Formats – Which to Choose?

T-Account Format

Resembles the letter T, with assets on the left and liabilities plus equity on the right. This is the most popular because it clearly shows the balance.

How to prepare:

• First line: Company name
• Second line: “Balance Sheet”
• Third line: Date of preparation
• Left side: List all assets
• Right side: List all liabilities and equity
• Both sides must be equal

Report Format

Lists items in order by category, often seen in annual reports of listed companies.

How to prepare:

• Same header as the T-format
• List all assets and total
• List all liabilities and total
• List owner’s equity and total
• Total liabilities plus equity should equal total assets

Why the Name Changed from “Balance Sheet” to “Statement of Financial Position”

Originally called “Balance Sheet” or “งบดุล,” emphasizing only the balance of the accounting equation but not what the document actually shows.

International Financial Reporting Standards (IFRS) and Thailand decided to rename it “Statement of Financial Position” or “งบแสดงฐานะทางการเงิน” to better reflect that it shows the true financial standing of the company.

Why is the Balance Sheet Important for Investment Decisions and Management?

For Investors:

• Liquidity analysis: Compare current assets to current liabilities to see if the company can pay short-term debts
• Profitability assessment: Use ratios like ROE to evaluate how well the company uses shareholders’ funds
• Debt balance: See how much the company relies on borrowed money versus own capital

For Management:

• Financial health check: Diagnose excessive debt or unused assets
• Investment planning: Decide which assets to acquire with profits
• Competitive comparison: Analyze their position within the industry

For Creditors and Financial Institutions:

• Debt repayment capacity: Assess whether the company’s assets are sufficient to cover its liabilities

How to Find and Read a Company’s Actual Balance Sheet

For investors wanting to study a company’s financial position, they can find it at:

Datawarehouse.dbd.go.th – a database of financial data for Thai companies

Steps to search:

• Visit Datawarehouse.dbd.go.th
• Select “Company Information and Financial Statements”
• Enter the company name
• Click on “Financial Data” tab
• View the balance sheet, income statement, and financial ratios
• You can compare across years and with other companies in the same industry

Tips for Analyzing a Balance Sheet (Not for Beginners)

1. Check Liquidity First

Current Ratio = Current Assets ÷ Current Liabilities

This ratio indicates how many baht of quick assets the company has to cover each baht of short-term debt. A safe range is typically 1.0–1.5.

2. Look at Debt-to-Equity Ratio

Debt-to-Equity Ratio = Total Liabilities ÷ Owner’s Equity

A lower ratio suggests the company relies less on borrowed funds and is more self-sufficient.

3. Assess Asset Efficiency

Asset Turnover = Revenue ÷ Total Assets

A higher number indicates better utilization of assets to generate sales.

4. Compare Year-over-Year Changes

Observe how assets and liabilities change over time. A continuous decrease in current assets might signal declining sales or collection issues.

5 Key Cautions Before Investing Based on the Balance Sheet

1. The balance sheet shows past data, not future prospects

It reflects the status at a specific date, e.g., December 31. Events after that date, like new ventures or accidents, are not included.

2. Data may be inaccurate

Whether accidental or intentional, errors or adjustments in the balance sheet can occur. Always cross-check with income statements, notes, and auditor’s reports.

3. Asset values may not reflect market prices

Assets like buildings and land are recorded at historical cost, not current market value. Therefore, the book value may be higher or lower than real worth.

4. Economic conditions can distort figures

High inflation, fluctuating interest rates, or currency devaluation can make last year’s figures less comparable.

5. Study the notes and disclosures

Read the accompanying notes and auditor’s comments for detailed explanations and observations.

Summary: The Balance Sheet Is a Snapshot, Not the Whole Picture

The balance sheet is a document that clearly shows a company’s financial position through the equation: Assets = Liabilities + Owner’s Equity. It includes current and non-current assets, liabilities, and owner’s equity.

For management, it helps assess financial health, plan strategies, and develop the business.

For investors, it complements other financial tools like income statements, cash flow statements, and ratios to make well-rounded investment decisions.

Remember, the balance sheet is just a snapshot in time. Good decision-making requires analyzing multiple years, understanding the broader economic context, financial institutions, and industry trends. When combined, these skills enable you to make smarter, more informed judgments.