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A company’s balance sheet, also known as a “statement of financial position,” reveals the firm’s assets, liabilities, and owners’ equity (net worth) at a specific point in time. The balance sheet, together with the income statement and cash flow statement, makes up the cornerstone of any company’s financial statements.
If you are a shareholder of a company or a potential investor, it is important to understand how the balance sheet is structured, how to read one, and the basics of how to analyze it.
Key Takeaways
- The balance sheet is a key financial statement that provides a snapshot of a company’s finances.
- The balance sheet is split into three sections: assets, liabilities, and owners’ equity.
- A balance sheet must balance out where assets = liabilities + owners’ equity.
- Assets and liabilities are split into long-term and short-term.
- Equity is the remainder value when liabilities are subtracted from assets.
Investopedia / Katie Kerpel
How the Balance Sheet Works
The balance sheet contains assets in the top section and liabilities and equity in the bottom section. These sections must be equal, or ‘balance’, with each other. The balance sheet formula is:
Assets = Liabilities + Shareholders’ Equity
This means that assets, or the means used to operate the company, are balanced by a company’s financial obligations, along with the value of equity in the company.
Assets are resources a company have from which it will derive probable future economic benefit, while its liabilities and equity are two sources that fund the assets.
Owners’ equity, referred to as shareholders’ equity, in a publicly traded company, is the amount of money initially invested into the company plus any retained earnings, and it represents a source of funding for the business.
The balance sheet is broken into two main areas. Assets are on the top, and below them are the company’s liabilities and shareholders’ equity. A balance sheet is always in balance, where the value of the assets equals the combined value of the liabilities and shareholders’ equity.
Within each section, the assets and liabilities sections of the balance sheet are organized by when the assets will be realized, or liabilities will be paid. The assets and liabilities are called current when they will be realized or paid within twelve months and non-current when they will be realized or paid after one year. For the asset side, the accounts are classified typically from most liquid to least liquid.
Important
It is important to note that a balance sheet is just a snapshot of the company’s financial position at a single point in time.
Types of Assets
Current (Short-Term) Assets
Current assets have a lifespan of one year or less, meaning that the company will usually receive the benefit from these assets within a year. For example, the company will collect cash from customers in less than a year and so accounts receivable is usually a current asset.
Current assets include cash and cash equivalents, accounts receivable, and inventory.
Cash, the most liquid current asset, also includes non-restricted bank accounts and checks. Cash equivalents are very safe assets that can be readily converted into cash; U.S. Treasuries are one such example.
Accounts receivables (AR) consist of the short-term amounts owed to the company by its clients. Companies often sell products or services to customers on credit; These amounts owing are held in the current assets account until they are paid by the clients.
Lastly, inventory represents the company’s raw materials, work-in-progress goods, and finished goods. Depending on the company, the exact makeup of the inventory account will differ.
For example, a manufacturing firm will carry a large number of raw materials, while a retail firm carries none. The makeup of a retailer’s inventory typically consists of goods purchased from manufacturers and wholesalers.
Non-Current (Long-Term) Assets
Non-current assets are where the economic benefit will be realized over more than a year. These assets tend to have a lifespan of more than a year. They can refer to tangible assets, such as machinery, computers, buildings, and land.
Non-current assets can also be intangible assets, such as goodwill, patents, or copyrights.
Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.
Types of Liabilities
On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term.
Current (Short-Term) Liabilities
Current liabilities are the company’s liabilities that will come due, or must be paid, within one year. This includes both shorter-term borrowings, such as accounts payable (AP), which are the bills and obligations that a company owes over the next 12 months (e.g., payment for purchases made on credit to vendors).
The current portion of longer-term borrowing, such as the latest interest payment on a 10-year loan, is also recorded as a current liability.
Non-Current (Long-Term) Liabilities
Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet. For instance, a company may issue bonds that mature in several years’ time.
Shareholders’ Equity
Shareholders’ equity is the initial amount of money invested in a business. If at the end of the fiscal year, a company decides to reinvest its net earnings into the company (after taxes), these retained earnings will be transferred from the income statement onto the balance sheet and into the shareholders’ equity account.
This account represents a company’s total net worth. In order for the balance sheet to balance, total assets on one side have to equal total liabilities plus shareholders’ equity on the other side.
How to Read a Balance Sheet
Below is a corporate balance sheet for Walmart as of Jan. 31, 2025:
Source: Walmart, Inc.
As you can see from the balance sheet above, Walmart had a large cash position of $9 billion in 2025, and inventories valued at over $56.4 billion. This reflects the fact that Walmart is a big-box retailer with its many stores and online fulfillment centers stocked with thousands of items ready for sale.
On the liabilities side, Walmart has $58.7 billion in accounts payable, likely money owed to the vendors and suppliers of many of those goods. Subtracting total liabilities from total assets, Walmart had a large positive shareholders’ equity value, over $97.4 billion.
Analyzing a Balance Sheet With Ratios
With a greater understanding of a balance sheet and how it is constructed, we can review some techniques used to analyze the information contained within a balance sheet. The main technique is financial ratio analysis.
Financial ratio analysis uses formulas to gain insight into a company and its operations. For a balance sheet, using financial ratios (like the debt-to-equity (D/E) ratio) can provide a good sense of the company’s financial condition, along with its operational efficiency.
It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet and the income statement.
Looking at Walmart’s balance sheet above, we can see that the debt-to-equity ratio as of Jan. 31, 2025 was:
D/E = Total Liabilities / Total Shareholders’ Equity = $163.4 billion / $97.4 billion = 1.68.
The result means that WMT had $1.68 of debt for every dollar of equity value.
Important ratios that use information from a balance sheet can be categorized as liquidity ratios, solvency ratios, financial strength ratios, and activity ratios. Liquidity and solvency ratios show how well a company can pay off its debts and obligations with existing assets.
Financial strength ratios, such as the working capital and debt-to-equity ratios, provide information on how well the company can meet its obligations and how the obligations are leveraged. These ratios can give investors an idea of how financially stable the company is and how the company finances itself.
Activity ratios focus mainly on current accounts to show how well the company manages its operating cycle (which includes receivables, inventory, and payables). These ratios can provide insight into the company’s operational efficiency.
Explain Like I’m 5
People are generally familiar with their own personal finances: what they own and what they owe. What you own, like your laptop, car, and house, are your assets. These are balanced against what you owe, such as your mortgage, loans, or credit card debt. The difference between the two is your net worth: what’s truly yours.
The balance sheet of a company works in the same way. It lists everything a company owns (assets), such as cash, equipment, and inventory, and balances that against everything it owes (liabilities), such as loans and unpaid bills to suppliers. The difference between assets and liabilities is shareholders’ equity, the owners’ stake in the company, which is the same idea as net worth.
The balance sheet provides a snapshot of a company’s financial condition at a specific moment. From it, people can understand a company’s financial health. If a company has more assets than liabilities, it is generally in a better financial condition. If the opposite is true, it may face financial difficulties.
Understanding the balance sheet enables investors, analysts, and managers to make informed decisions about investing and strategy.
How Will I Use This in Real Life?
Understanding what a balance sheet can tell you will help you in investing and making informed financial decisions. A company’s balance sheet will tell you if it is in a stable financial condition or struggling with debt. Based on other factors about the company, you can determine whether it’s a good investment or if you might lose your money.
Similarly, you can organize your own finances like a balance sheet to get a clear understanding of your own financial profile. This can help you with budgeting, planning for future expenses, and setting financial goals.
What Can You Tell From Looking at a Company’s Balance Sheet?
Balance sheets give an at-a-glance view of the assets and liabilities of the company and how they relate to one another. 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 the company is highly indebted relative to its peers. Fundamental analysis using financial ratios is also an important set of tools that draws its data directly from the balance sheet.
What Are the Main Things Found on a Balance Sheet?
The balance sheet includes information about a company’s assets and liabilities, and the shareholders’ equity that results. These things might include short-term assets, such as cash and accounts receivable, inventories, or long-term assets such as property, plant, and equipment (PP&E). Likewise, its liabilities may include short-term obligations such as accounts payable to vendors, or long-term liabilities such as bank loans or corporate bonds issued by the company.
Does a Balance Sheet Always Balance?
Yes, the balance sheet will always balance since the entry for shareholders’ equity will always be the remainder or difference between a company’s total assets and its total liabilities. If a company’s assets are worth more than its liabilities, the result is positive net equity. If liabilities are larger than total net assets, then shareholders’ equity will be negative.
The Bottom Line
A balance sheet, along with the income and cash flow statement, is an important tool for investors to gain insight into a company and its operations. It is a snapshot at a single point in time of the company’s accounts, covering its assets, liabilities, and shareholders’ equity.
The purpose of a balance sheet is to give interested parties an idea of the company’s financial position, in addition to displaying what the company owns and owes. It is important that all investors know how to use, analyze, and read a balance sheet. A balance sheet may give insight or reason to invest in a stock.
