Understanding Balance Sheets

Introduction

• Ability to assess a company's financial status quickly by reading its balance sheet.
• Presenter: Brian Faldi, a financial educator with 20 years of experience.

What is a Balance Sheet?

• One of the three major financial statements.
• Displays everything a company owns and owes.
• Used to assess a company's net worth and financial health.
• Governed by the accounting equation: Assets = Liabilities + Shareholders' Equity.
• Represents a specific date, like a snapshot of the company's financial status.

Components of a Balance Sheet

1. Assets

• Definition: Items of value owned by the company.
• Order: Listed by liquidity (quick conversion to cash).
• Subcategories: Current and Long-term Assets
  • Current Assets (used within a year):
    • Cash
    • Marketable securities
    • Accounts receivable
    • Inventory
    • Other current assets
  • Long-term Assets (benefit company for over a year):
    • Fixed assets (real estate, buildings, equipment)
    • Goodwill (premiums for acquisitions)
    • Intangible assets (brand names, trademarks)
    • Other long-term assets

2. Liabilities

• Definition: Debts and payments owed to others.
• Order: Listed by payment urgency.
• Subcategories: Current and Long-term Liabilities
  • Current Liabilities (due within a year):
    • Accounts payable/accrued expenses
    • Short-term debts
  • Long-term Liabilities (due after a year):
    • Long-term debt
    • Other long-term liabilities (pensions, leases)

3. Shareholders' Equity

• Definition: Amount owed to business owners/shareholders.
• Subcomponents:
  • Common stock: Sold at par value.
  • Additional paid-in capital: Stock sold above par value.
  • Retained earnings: Profits kept in the business.
  • Treasury stock: Stock repurchased by the company.

Importance of Key Numbers

• Not all numbers equally important; focus on key metrics.
• Five Key Numbers to Analyze:
  1. Cash and Marketable Securities: Reflects immediate resources.
  2. Short and Long-term Debt: Indicators of company’s funding methods.
  3. Goodwill: Shows acquisition strategy.
  4. Retained Earnings: Cumulative profit indicator.
  5. Treasury Stock: Indicates stock buybacks.

Example: Chipotle Mexican Grill

• Cash and Investments: ~$1.9 billion, no debt, a financial fortress.
• Goodwill: $22 million, small compared to $8 billion in assets.
• Retained Earnings: $6 billion, strong profit generation.
• Treasury Stock: Indicates $5 billion stock buyback.

Conclusion

• Master balance sheet analysis through practice.
• Focus on key terms for quick assessment.
• Encouragement to engage with more accounting content.