Why should you look at the balance sheet? Common issues investors often overlook

If you are considering which company to invest in or are an executive looking to assess the financial health of an enterprise, the Financial Position Statement ( or also called the Balance Sheet ) is a tool that helps you see the overall picture clearly. It’s not just about numbers but tells the story of the finances behind every decision.

What is the Financial Position Statement ( or Balance Sheet )? Really?

Balance Sheet is a financial statement designed to show a “snapshot” of a company’s financial status at a specific point in time. It’s similar to taking a photograph of the assets and liabilities of the business on a given date.

The importance of the balance sheet is not only in the figures but in what those numbers reveal about the strength, risks, and potential of the company. It can be compared with similar industry peers to see how well the company competes.

Basic Structure: The Formula You Must Remember

Assets = Liabilities + Shareholders’ Equity

This is a fundamental accounting principle. The balance sheet always balances because of this. An increase in assets must come from somewhere, whether from borrowing (Liabilities ) or from the owner’s equity (Shareholders’ Equity ).

###The 3 Components You Need to Know###

(# 1. Assets )Assets( - “What the company owns”

Assets are everything the company possesses and can use to generate income.

Current Assets )Usable quickly(

• Cash and cash equivalents
• Trade receivables )Money owed by customers(
• Inventory
• Prepaid expenses All designed to be converted into cash within a year

Non-current Assets )Usable over a long period###

• Land, buildings, machinery
• Long-term investments
• Licenses, patents All assets intended for long-term operations

(# 2. Liabilities )Liabilities( - “What the company owes”

Liabilities are obligations the company must repay externally. They are divided into:

Current Liabilities )Payable soon(

• Trade payables
• Short-term loans
• Tax liabilities Must be paid within one year

Non-current Liabilities )Payable later###

• Long-term bank loans
• Long-term bonds Must be paid in the coming years

(# 3. Shareholders’ Equity )Equity( - “What the owner truly has”

Shareholders’ equity = Net assets )Assets minus liabilities(, divided into:

Share Capital Money raised from shareholders to establish the company

Retained Earnings )or Accumulated Losses( Profits accumulated since the company’s founding, after dividends paid to shareholders. If the company incurs losses, the accumulated deficit also builds up.

Why has the name changed from “Balance Sheet” to “Statement of Financial Position”?

The term “Balance Sheet” merely describes that the accounts balance but does not specify the purpose. The international standard )IFRS### changed the name to “Statement of Financial Position” to clearly show that this is a presentation of the financial position of the company. Thailand has also adopted this naming to align with international standards.

How to prepare and format

( Format 1: T-Form )Account Format###

Arranged in two parts: the left side is assets, the right side is liabilities and shareholders’ equity. Similar to the letter T, easy to read and most popular.

( Format 2: Report Form )Financial Statement Format###

Items are listed sequentially: assets first, then liabilities and equity. Takes longer to read but provides more detail.

What does the balance sheet tell us?

1. Liquidity - Can the company pay its debts?

Very important for investors and creditors. Look at the ratio of current assets to current liabilities. A high ratio indicates the company has enough cash to pay short-term debts.

2. Profitability - Does the company generate good income?

From the balance sheet, observe shareholders’ equity and retained earnings. An increasing trend year over year indicates profitability. Growing accumulated losses suggest problems.

( 3. Debt-paying ability - Is the company risky?

Check the debt-to-equity ratio. If liabilities are too high compared to equity, the company may be at risk of bankruptcy.

Where can you view a company’s balance sheet?

Investors can view the balance sheet at Datawarehouse.dbd.go.th )Department of Commerce Database### by visiting the website and following these steps:

Steps to find:

1. Visit Datawarehouse.dbd.go.th
2. Select “Legal Entity and Financial Data”
3. Enter the company name you want to check
4. Choose the “Financial Statements” tab
5. Select the fiscal year you want. You can also view financial ratios, compare year-over-year, or compare within the same industry.

How to correctly read a balance sheet

Step 1: Understand the structure first

Don’t dive straight into the numbers. Take time to understand what each part means.

Step 2: Look at the overall picture

How much assets are there? How much liabilities? How much shareholders’ equity? What do these figures indicate?

Step 3: Examine details

Which parts are expanding? Which are contracting? Why is that?

Step 4: Compare year over year

Review the balance sheets of 2-3 past years. What is the trend? Is it developing positively?

Step 5: Compare with competitors

Look at the balance sheets of peer companies in the same industry. Which company is stronger?

Important precautions when reading a balance sheet

1. Past data only

The balance sheet shows the financial status at a specific point in time. It is not real-time data. If the company has significant changes after the date of the balance sheet, such as technical issues or major management changes, the figures previously read may no longer reflect the current situation.

( 2. Reliability

Balance sheets can be manipulated or falsified. Some companies may record accounts using controversial methods )@E5@E0@ to make the figures look better than reality. Therefore, reviewing the entire financial system, notes, and auditor’s opinion is crucial.

3. Economic context

Economic conditions change. High inflation, interest rate fluctuations, or currency devaluation all affect the meaning of the figures in the balance sheet. The same number may mean different things in different economic periods.

4. Review other financial reports as well

The balance sheet is one dimension. Another important dimension is the Income Statement (How much revenue the business generates) and the Cash Flow Statement (Actual cash inflows and outflows), along with various financial ratios.

Summary

The Financial Position Statement or Balance Sheet is a fundamental tool for anyone wanting to understand a company’s financial story. It shows how much assets the company owns, how much debt it has, and how much shareholders have a stake.

For executives, it helps assess financial standing and plan strategies. For investors, it aids in deciding whether to invest in the company. For creditors, it helps evaluate credit risk.

However, just reading the balance sheet alone is not enough. It’s essential to review other financial data as well. At minimum, understanding the overall picture and continuously developing oneself can help become a more knowledgeable investor and manager.