Balance Sheet Literacy

Investment Analysis Clubs Saul’s Investing Discussions
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Balance Sheet Data (in millions)
					2014		2013		2012
Current Assets				$10,997	        $10,950	       $9,537
Current liabilities			6,222		6,032		4,906
Long-term liabilities			2,283		715		627
Equity					6,824		7,495		6,929

I was hoping to get some help. I’m reading through a company’s 10K report and come across the above table.

What am I looking at here? What is the difference between current liabilities and long-term liabilities? What is equity? Is that cash or actual equity in the company? From this table can I determine how much debt the company is carrying and/or how much cash the company is sitting on?

I’m sorry for all the questions but I’m trying to understand this stuff better. This is the first time I’ve ever gone through a company’s 10K report. I’m trying to finish an analysis of the above company for Neil’s Weekly Analysis board. Any help would be greatly appreciated. Thanks!

  • Matt
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There are bunch of quality resources on the web for this.

I use investopedia time to time… You could find others too easily by Google search.

http://www.investopedia.com/terms/b/balancesheet.asp

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Btw - Congrats on taking the step to read balance sheet and 10K.
You are now in next semester of learning to invest!!

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Thanks Nilvest. The Investopedia link was definitely helpful.

  • Matt
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Hi Matt,

What am I looking at here? What is the difference between current liabilities and long-term liabilities

Current Liabilities is mostly all the debt that must be paid off in the next year. Current liabilities is made up of a lot of different sub categories and to understand it you need to understand all of the sub categories. Sub categories like Accounts payable, Income tax payable are just normal business expenses. What I look for is debt that they are paying interest on, like a loan. This in my opinion is the true short term debt and must be paid with in the next year.

Long term Liabilities is debt that has to be paid off in the years ahead. As long as they are able to pay off the short term debt I do not look to hard into the long term debt. Unless their debt to equity is so high that it is alarming. An easy ratio is to divide the total liabilities by the total assets. This will give you a ratio of debt to equity. The lower the better. Some people do deep dives into the debt to see what interest rates they are paying and how long the loan is, whether it is fixed or floating. You might have to do this if you are trying to figure out if a company is going to go bankrupt, or cut it’s dividend, but for most companies you will just want to walk away from them if they have to much debt.

What is equity?

Equity is all the assets of the company. Like liabilities there are a lot of subcategories.

Is that cash or actual equity in the company?

Cash is a subcategory under equity. I like to look at current Assets, this will tell you how much short term cash a company has. I look for subcategories like, Cash, Marketable securities This is short term cash that they can access today. Also Restricted Cash is good also because this is cash that they will have access to in the following year. Usually their is some stipulation they will have to complete in order to get access to it. So you will need to know what the restrictions are.

I like to look at Assets that are current and I take the Cash, Marketable securities, Restricted Cash, and take them against the Current Liabilities, Short term debt. To see how a company is doing.

I am glad to see you taking these steps Matt, it is very helpful to you and the community. A great book that will help you to understand is John A. Tracy “How to read a financial report”. He takes you through the financials in an easy to read format.

You can go really deep into the financials or just look at the things that matter to you. Tom Engle’s page posts were very helpful to me in determining what is important. Also do not worry about making mistakes. We all make them and people that correct you are just making you better at looking at investments. I used to get really caught up in the details but now I am trying to abbreviate my research so that I can look at more companies.

Andy

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and for only $9.09 there is this highly recommended book at Amazon

Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports
The older first edition is even cheaper used.

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Thanks for this post Andy. I am in the same boat as mkcochrane in that I am going to start learning how to understand financials. I will purchase the book you recommended.

Gary

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Gary,
Your welcome. I know of two classes on the Fool for this book. Here is one I participated in that David (Onecandream) led.

http://discussion.fool.com/new-class-starting-30680553.aspx

That will take you through most of the chapters. I think the other class is referenced in one of the posts also.

Andy

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Thanks Andy and Mauser for the information! It is much appreciated!

  • Matt
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buyandholdisdead (et al.)

I hate to barge in, but there is something in your answer that needs to be changed.

You said: Equity is all the assets of the company. Like liabilities there are a lot of subcategories.

Although the term ‘equity’ is thrown about rather loosely, in financial terms, it is quite strictly defined as:

Equity = Assets - Liablities

The most familiar example is your home. When you are asked how much equity you have in your home, you take the assumed market price (its “asset value”) of the home and subtract off what you owe on the mortgage (the associated liability).

BTW, most companies report a line item under the Assets category of “cash and near-cash equivalents”. This would be the amount they could easily spend, either by writing a check or selling some very liquid assets for cash.

Once you master the balance sheet, it is on to the Income Statement!

Tiptree, Fool One guide

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Triptree,

I hate to barge in, but there is something in your answer that needs to be changed.

You said: Equity is all the assets of the company. Like liabilities there are a lot of subcategories.

Although the term ‘equity’ is thrown about rather loosely, in financial terms, it is quite strictly defined as:

Equity = Assets - Liablities

Thanks for your correction. It looks like I need to study a little harder :). It is important for people to speak up and correct statements that are incorrect.

Andy

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I will check this out. Thanks again Andy.

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What am I looking at here?

You are looking at excerpts from a balance sheet. It is far from a complete balance sheet, as many items are missing.

What is the difference between current liabilities and long-term liabilities?

Current liabilities are debts the company owes that must be paid in the next year (or rarely, the next operating cycle if that is longer). Long term liabilities are debts that are due in more than one year.

What is equity?

Tiptree covered that one well. It is the assets minus the liabilities.

Is that cash or actual equity in the company?

In a simplified sense, equity includes money transferred into the company for the original issuance of stock, plus all earnings (and less losses) from the beginning of the business, and less any dividends paid to shareholders. It has nothing at all to do with actual cash in the bank.

From this table can I determine how much debt the company is carrying …?

Yes. That would be the total of the current liabilities plus the long term liabilities. And as Tiptree again very correctly noted, current liabilities will include accounts payable, which are normal operating expenses which have been incurred but not yet paid. That may or may not fit the definition of debt you want to use for any particular analysis.

and/or how much cash the company is sitting on?

Nope. Can’t squeeze that out of those excerpts. But keep looking around in that 10k, as there will be a full balance sheet in there somewhere. That will clearly identify cash the company has on hand.

Good luck on your forays into financial statements. I think they are one of the major keys to understanding a company and it’s suitability as an investment. But then again, I’m a CPA (although no longer operating in the financial realm, but sticking to taxation) and find financial statements fascinating.

–Peter

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I wanted to thank everybody again for all the help and book recommendations: Andy, Nilvest, Peter, and Tiptree. I really appreciate it.

After soliciting advice, I realized it wasn’t a subject I could easily learn by skimming some articles in a few minutes. So I did buy a book on this subject at Amazon and will probably buy more.

The company was MasterCard. For any interested, I submitted my analysis of it on Neil’s Weekly Analysis board here:

http://discussion.fool.com/mastercard-ma-report-31909029.aspx

Thanks again everyone!

  • Matt
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Triptree,

I hate to barge in, but there is something in your answer that needs to be changed

I meant Tiptree of course.

Andy

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Equity is tough concept
It’s retained earnings that aren’t spent in operating earnings but that doesn’t mean that cash is there as something the company can reassure investors with as far as solvency. Likewise negative equity is doesn’t mean the company is a dangerous investment

Moody’s has negative equity and has had almost constantly since it was spun off. It has been an excellent investment. They are asset-lite and buy treasury shares making equity low to negative.

The statement of shareholder equity is in filings and gets overlooked.It details shares issued, treasury shares purchased, retained earnings and capital surplus and calculates equity form those numbers. You can see that Moody’s has $6.04 billion in retained earnings but has spent $6.4 billion on treasury shares. Share count has decreased over the past 8 years by 20%. Equity is negative. That doesn’t tell you much except that negative equity isn’t a marker for a bad business

In order to decide whether the $6.4 billion was well spent and benefitted shareholders you need to go further and look at the options grants, the price paid to replace those shares and whether the options issued were too generous or a waste of shareholder cash.

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