Be a great investor by reading the balance sheet like a boss | by Khuong Lan Cao Thai | Sep 2022


It is often perceived as a boring and complex document to read. Let me make it easy for you.

Photo by Austin Distel on Unsplash

Last week we learned how to read an income statement and practiced with Nvidia P&L.

This week, let’s focus on the balance sheet.

It is often overlooked and seems too complicated to review. If you invest and choose stocks, it is a mistake. You should be familiar with balance sheets.

My goal is to make it as simple as possible so you can start looking at the various balance sheets of the companies you want to invest in.

Let’s review the fundamentals

The balance sheet is a instantaneous financial health of the business at any given time.

The key formula to remember is:

Assets = Liabilities + Equity

The formula is always balanced hence its name

Here is an overview of a company’s balance sheet:

The most important thing to remember is that you have two types of assets: short-term and long-term. The difference is that the former are more liquid, which implies that they will be used in less than a year.

Current assets:

  • Cash and equivalents: current account, treasury bills…
  • Marketable securities: stocks, bonds
  • Accounts Receivable: Money that customers owe the company
  • Inventory: Unsold goods
  • Prepaid expenses: Insurance, rent, etc.

Long-lived assets:

Tangible assets (can be physically affected)

  • Buildings
  • Equipment
  • Property
  • Stores

Intangible assets

  • Trademarks
  • Good will
  • Patents
  • Shares/Bonds held > 1 year

Similar to the Assets section, you have 2 types of liabilities: short-term and long-term.

Current liabilities (due in less than a year):

  • Short term debt
  • Accounts payable (money due to suppliers)
  • Unpaid wages
  • Interests
  • Taxes
  • Dividends

Long-term liabilities (due in over a year):

  • long-term debt
  • Customer prepayment
  • Taxes
  • Pension

It is the money that belongs to the shareholders.

  • Preferred Stock: action offering a fixed income payment
  • Ordinary actions: money invested in the business
  • Premium: money shareholders have invested beyond common/preferred stock
  • Retained earnings: net profits that a company reinvests in the business
  • Own shares: amount of money used to buy back shares

If the income statement shows how much a company *earns*, the balance sheet shows how much *capital* was needed to make that revenue possible.

The balance sheet can help answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether it is heavily indebted compared to its peers. .

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and does not constitute investment advice or a solicitation to buy or sell assets or to make financial decisions. Be careful and do your own research.

You can download the Apple balance sheet here.

We find the formula:

Assets = Liabilities + Equity




The balance sheet is an essential financial statement for the fundamental analysis of a company. It should be combined with the other two documents (income statement and cash flow statement) to provide a more detailed and complete picture of the financial statements.


About Author

Comments are closed.