imagine if you could quickly tell if a company was a financial Fortress or on the verge of bankruptcy believe it or not but you can do just that in a few seconds once you learn how to read a balance sheet but what is a balance sheet and how does it work in this video I'll explain the layout key terms and how to analyze it quickly all in less than 10 minutes hi my name is Brian faldi I'm a financial educator who's been analyzing and investing in businesses for more than 20 years but let's get started so what is a balance sheet a balance sheet is one of the three major financial statement that shows everything that a comp owns and owes to others it's used by managers investors and lenders to get a snapshot of a company's net worth and overall Financial Health the balance sheet has three major components assets liabilities and shareholders Equity the balance sheet is governed by the master accounting equation which states that assets must always equal liabilities plus shareholders Equity this equation must always perfectly be in Balance hence the name of the balance sheet now an important detail to know right way about a balance sheet is that it always has a specific day associated with it think of this date as if someone took a picture of a company's net worth on paper that picture is an account of the company's net worth as of that specific date now that we have a basic overview of the balance sheet let's take a closer look at assets assets are everything that a company owns that has value assets are listed on the balance sheet in order of their liquidity which simply means how quickly something can be converted into Cash the most liquid assets are on top of the balance sheet and the least liquid assets are on the bottom now assets can be broken down into two major subcategories current assets and long-term assets current assets are all assets that the company expects to use in less than one year the Topline item of the company's assets is Cash which is simply the total cash balance that a company has in its bank account the next number you'll see is marketable securities which are all cash-like instruments that could easily be converted into cash in less than a year such as a CD held at a bank or a bond that matures in less than a year the next item you'll see is accounts receivable this is the total amount of outstanding credit sales that customers owe to the company for goods and services they have purchased but haven't yet paid for below that comes inventory which are all of the goods that a company has available for sale and then the final current asset is called other current assets which is a catchall category for current assets that don't fit elsewhere when added together all of those numbers equal the company's total current asset values that brings us to our second major subcategory called long-term assets these are the assets that a company expects to benefit the company for longer than one year the top item here is called fixed assets which are all tangible assets that expected to have a longer than oneyear shelf life this includes real estate buildings and equipment please note that the value of these assets are gradually depreciated or written down over time as their value declines due to wear and tear they are listed on the balance sheet at their current market value the next item is a tricky one called Goodwill this is the cumulative premiums that a company has paid over its lifetime to make Acquisitions looking at this number can quickly tell you if a company has been acquisitive in its past or not after that comes intang assets which are all assets that a company owns that have value that can't be physically touched this could include things like brand names trademarks copyrights and customer lists the final category is called other long-term assets and includes all other long-term assets that aren't easily classified above this includes operating lease rateof use assets brand value Hedges and more when added together these numbers give us the total long-term asset assets finally when we add up the total value of current assets plus long-term assets we get the total amount of assets that a company owns that brings us to the second major component of the balance sheet which is liabilities which are the debts and payments that a company owes to others such as suppliers employees and lenders liabilities are listed in the order at which they are expected to be paid off the liabilities that are due the soonest are at the top and the liabilities that are due the latest are at at the bottom just like assets liabilities can be broken down into two major subcomponents current liabilities and long-term liabilities current liabilities are all the bills that are expected to be paid off in less than one year the first line item of current liabilities is called accounts payable or acred expenses these are all the short-term bills that are owed to others this could include things like unpaid salaries to employees or any outstanding bills that are owed to suppliers below this number are short-term debts this is a list of all the principal and interest payments that are owed to creditors that are due within the next 12 months when added together we get the total amount of current liabilities that are owed to others in the next year the second major subcategory is called long-term liabilities which are all the liabilities that do not need to be paid off for more than a year the top item in this category is long-term debt which are all the debts that a company owes to creditors but the company has more than one year to pay them by back you will often see this term called notes or convertible debt or other such names after that is a catchall category called other long-term liabilities which could include things like pension obligations and contracted lease payments when added together we get the total value of a company's long-term liabilities that are due in more than one year and when we add up current liabilities and long-term liabilities we get the company's total liabilities owed to others that brings us to the final major component of the balance sheet which is called shareholders Equity this is the total amount that the company owes to the owners of the business which are called shareholders shareholders Equity has two major subcomponents the first major subcomponent is the capital that investors put into the business to get it started and fund its operations and the second is the profit that was internally generated by the company and was kept inside the business starting at the top we see a category called common stock this is all of the stock that the company sold to outside investors at par value below that is a category called additional paid in capital this is all the common stock sold to investors above par value it's worth noting that additional paid in capital is normally a much bigger number than common stock even though these two terms represent largely the same thing the next major category is called retained earnings which is the cumulative amount of profit a company has generated over its lifetime that hasn't been paid out as dividends and the final number you see on shareholders Equity is called treasury stock which is the total amount of stock that a company has rep purchased from its investors through stock buybacks all of the company's Equity sources are added together to get the company's total equity which when we add to the company's liability gives us the total liabilities plus shareholders equity and this number always exactly equals the company's total assets now it's important to understand that not all balance sheets will look exactly like this each company can choose the categories names and layout of its balance sheet when they are producing Financial statements for example even the name balance sheet isn't used by all companies others call it the net worth statement the statement of financial position or the financial status report and each of the terms that you see on the balance sheet may have other synonyms as well and unfortunately this is true of all the major financial statements where the terms and categories they're use are not standardized now to make understanding these terms easier I created a free ebook called financial statement school which explains the layout and key terms you might see on each of the three financial statements if you're interested in downloading a free copy simply visit the website that you see on the screen click the QR code or click the link in the video description now while all the numbers on a balance sheet are useful some are actually more important than others when I'm analyzing a balance sheet there are five key numbers that I always look at first the first number I pay attention to is cash and marketable securities which I always add together this is one of the most important numbers on a balance sheet and it gives you an idea of the immediate resources that a company can access the next number I always look at is a company's short and long-term debt which I always add together this number will tell me if a company uses debt to fund its operations or not now by simply looking at the company's cash balance and debt levels you can quickly get a sense for the Financial Health of a business as a general rule companies with lots of cash and no debt are in fantastic Financial shape and companies with not much cash and billions in debt could be in trouble now while cash and debt are by far are the most important numbers to look at there are three other numbers that I keep my eyes on the next number I always look at is Goodwill if this is a big number relative to the company's total assets it tells me that a company's strategy is to grow by acquiring other businesses which is a strategy that generally speaking I do not like the next number I look at is retained earnings this is the cumulative amount of profits a company has generated since it was founded now if this number is positive it means the business has generated more money for its investors and it's lost over its lifetime which is a good thing the final number I paid close attention to is treasury stock if this number is listed which is not always is it indicates that the company has been buying back its own stock which is generally a positive sign for investors now that you know the five key numbers to look at let's take a look at the balance sheet of a real company to see these numbers in action here is the balance sheet for Chipotle Mexican Grill as of December 31st 2023 please note that you won't see it formatt this in the company's SEC filings but I format it this way to make it easier to read so when I'm analyzing Chipotle's balance sheet quickly the first thing I look at is the company's total cash balance now in this case I'm going to add the company's long-term Investments to this number and when I do so I see that this company has roughly $1.9 billion in total cash and cash equivalents at its disposal now that is a huge number now the second thing I'm going to look for is the company's debt balance and I'm going to scroll down the company liabilities looking for names like debt convertible debt or notes now I actually don't see that listed anywhere on here which means that Chipotle's balance sheet has nearly $2 billion in cash and 0 in debt which makes this company a financial Fortress great to see now from there I'm going to key in on the company's Goodwill statement this company has 22 million in Goodwill now that might sound like a big number but when you compare it to the $8 billion in total assets it's actually a very small figure that tells me that chipotle has not grown by acquisition instead it's grown organically which is a great sign for me as an investor the next number I'm going to look at is retained earnings which is $6 billion that tells me that chipotle has generated a fabulous amount of profits since it was founded and the final number here to look at is treasury stock which is a negative $5 billion number that tells me that chipotle has bought back or repurchased nearly five billion dollars of stock from its investors since it came public that means that this company is actively returning Capital to shareholders another positive sign so with just a few seconds of analysis you can quickly tell that chipotle is a financial Fortress which is great to see now like any skill the best way to master balance sheet analysis is simply to practice if you can train yourself to focus on these five key terms when analyzing a balance sheet you'll be able to analyze any balance sheet you come across quickly well I hope you enjoyed this video if so give it a thumbs up that really helps us out on YouTube and if you want to keep learning about accounting click this video that you see here next