A balance sheet is a snapshot, on one date, of everything a company owns (assets), everything it owes (liabilities), and what's left over for shareholders (equity, also called net worth). The two sides always balance: assets = liabilities + equity.
Why does it always balance?
Start at home. Harpreet buys a house worth ₹80,00,000. She pays ₹30,00,000 from her savings and takes a home loan of ₹50,00,000. Her personal balance sheet:
| Owns (assets) | Owes and own money |
|---|---|
| House ₹80,00,000 | Home loan ₹50,00,000 (liability) |
| Own money ₹30,00,000 (equity) |
The house didn't appear from nowhere. Every rupee of it was funded either by borrowing or by her own money. That's the whole trick: the assets side lists what the money became; the other side lists where the money came from. They must match, always.
If the house's value rises to ₹90,00,000 while the loan stays at ₹50,00,000, Harpreet's equity grows to ₹40,00,000. If the value falls to ₹55,00,000, her equity shrinks to ₹5,00,000. Equity absorbs the swings, exactly as shareholders' equity does in a company.
What does a company's balance sheet look like?
Here is Kaveri Motors, our fictional vehicle maker, in round figures:
| Assets | ₹ crore | Funded by | ₹ crore |
|---|---|---|---|
| Factories and machinery | 500 | Shareholders' equity | 500 |
| Inventory (unsold vehicles, parts) | 200 | Borrowings | 250 |
| Receivables (customers yet to pay) | 150 | Payables and other liabilities | 250 |
| Cash and investments | 150 | ||
| Total | 1,000 | Total | 1,000 |
Reading the assets side: factories and machinery are long-term assets that produce goods for years; inventory, receivables and cash are current assets that churn within the year. Receivables deserve attention. That ₹150 crore is sales already booked as revenue in the profit and loss statement but not yet collected in cash.
Reading the funding side: shareholders' equity (₹500 crore) is the owners' money, the original share capital plus every year's retained profits. Borrowings (₹250 crore) carry interest and must be repaid. Payables (₹250 crore) are amounts owed to suppliers and others in the normal course of business.
Divide equity by the share count (₹500 crore ÷ 10 crore shares) and you get book value of ₹50 per share. The number behind the P/B ratio in what are EPS, P/E ratio and book value.
What should I check first?
- How much debt, versus equity? Kaveri Motors owes ₹250 crore against ₹500 crore of equity, a debt-to-equity ratio of 0.5. Whether that's comfortable is the subject of what are debt-to-equity and interest coverage.
- Are receivables and inventory growing faster than sales? If so, goods are piling up or customers aren't paying. Profits may be less real than they look.
- Is there enough cash? A company with thin cash and large near-term repayments can be profitable on paper and still hit trouble.
- Is equity growing over the years? Retained profits should compound equity upward. Shrinking equity means losses are eating the base.
Things to keep in mind
- A balance sheet is one day's snapshot. Companies know the date in advance, so compare several year-ends rather than trusting one.
- Asset values are accounting figures, not sale prices. A machine "worth" ₹50 crore on paper may fetch far less in reality; a valuable brand may not appear at all.
- Read the P&L, balance sheet and cash flow statement together. Each covers the blind spots of the other two.
- A strong balance sheet lowers risk; it does not by itself make the shares a good buy at any price.
Read next
What are debt-to-equity and interest coverage? — The two ratios that say whether the debt on that balance sheet is safe.