Every public company is required to release a number of financial documents to give investors an overview of how the company is performing.
One such document that is required is the balance sheet, which lists all the company’s assets and liabilities. You can find this on the company’s website (usually under Investor Relations) or on financial websites like Yahoo Finance.
Many people get scared off by the prospect of having to read financial documents, but it doesn’t take a degree in business to be able to understand a few key figures. The first time you look at one, you may be overwhelmed, but as you grow as an investor, you’ll grow more comfortable with them.
Cash & Cash Equivalents
This is the amount of cash the company has on hand. You can quickly check this figure against last year’s figure – if it’s going up, that’s a good sign.
That means the company is taking in and saving more money. This can be used to pay off debt, pay dividends, or grow the company.
If cash has gone down, try to find out why. It’s not always a bad sign. Perhaps the company put the money to good use.
Long Term Debt
In the liabilities section you’ll see the company’s long term debt. Is this figure going down from previous years? That’s also a good sign.
This means management is making enough money to pay off their debt.
Debt going up is usually a bad sign, but again, look a little deeper. Perhaps they borrowed in order to fund a great acquisition that will pay off further down the line.
Total Shares Outstanding
This is the amount of shares that are available for purchase right now. This includes the shares that were sold at the initial public offering and any other shares that have been issued since. If this figure is going down, that’s a good sign.
That shows that the company is buying back shares and retiring them. This means there is a bigger slice of the pie for each individual shareholder.
In a young growth company, you will usually find this number increasing. This isn’t a bad sign, as young companies need to raise capital, usually by issuing more shares.
No one figure on a balance sheet will tell you if a company is a good investment or not. A balance sheet is useful for getting an overview of where the company stands and can highlight further avenues to explore before you invest.
Balance sheets
- Balance sheets may appear complicated at first, but a few key figures can give you a good idea of a company’s financial health.
- In general, you want to see cash increasing, while debt and total shares should be decreasing.
- If something appears unusual, investigate a little deeper – it’s important to understand the companies you are investing in.
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