An Introduction to the Balance Sheet MG Academy

An Introduction to the Balance Sheet: What is it, Why is it Important, and Where can it be Found?

schoolbusThis article is the first week’s lesson in the ModernGraham Academy beginner’s course, An Introduction the the Balance Sheet.  The ModernGraham Academy is a place to learn about the basics of investing, with an emphasis on the ModernGraham approach.

This course will be a detailed look at the balance sheet, starting with a basic overview, then a look at each part of the statement individually, and finishing up with a review and some final comments.

An assignment is given each week; if the assignment is completed before the next week’s lesson and emailed to ben AT moderngraham.com (replace the “AT” with @), feedback will be provided.

This week we look at the basics behind the balance sheet.  Understanding the balance sheet is one of the most important parts of investing.  The balance sheet outlines the assets and liabilities of the company and is critical to any evaluation.

What is the Balance Sheet?

The Balance Sheet is one of the financial statement that all public corporations must report to the public.  It includes a listing of the assets and liabilities of the company.   The first part of the balance sheet shows the assets, usually separated between Current Assets (cash, cash equivalents, inventories, and debts owed to the company in the near future) and Non-Current Assets (property, plant, equipment, long-term investments, etc.).  The second part lists the liabilities, separated similarly to the asset side with Current Liabilities (short-term debt, accrued expenses, etc.) and Non-Current Liabilities (long-term debt, deferred income tax, etc.).

Why is it Important?

Any evaluation of a company should start at the balance sheet.  In order to determine a company’s worth, you must know what the company owns (assets) and what the company owes (liabilities).   Without knowing the assets and liabilities, it is impossible to do any reasonable evaluation of the company.  Some basic valuation methods look solely at the balance sheet (we will explore those in a later course), but even valuation methods that are based on the income statement must take into account the balance sheet.

Where Can I Find It?

There are a number of great resource sites for obtaining a company’s balance sheet.  First and foremost, is the EDGAR database.  This is the primary source; the spot to obtain a company’s official filings with the SEC.  However, the EDGAR database is not entirely user-friendly.  Instead, you can use MSN Money, Yahoo Finance, or Google Finance (among many others).

Homework

The assignment this week is to find a balance sheet.  To receive credit, please email (ben AT moderngraham.com) the company name, ticker symbol, and date of the balance sheet.  Then include the figures for “Cash”, “Property, Plant and Equipment”, “Goodwill”, and “Total Liabilities.”

An Introduction to the Balance Sheet Course Overview

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