leading business online module - balance sheet

LEADING BUSINESS !Online Module !

Etisalat Masters Development Program!

Deciphering the Balance Sheet

A balance sheet is a !

snapshot!

A SNAPSHOT that provides a financial picture of a company at a specific point in time.

Usually that time is the last day of a month, a quarter, or a financial year.

Standards of accounting dictate that at least two “snapshots” or periods are shown.

For example we can look at the balance sheet for a company as of December 31st, 2012 and December 31st, 2013.

The balance sheet provides information on:

1. ASSETS The resources and items

you OWN that have economic value, such as

cash, accounts receivable, buildings, equipment, and

other things used to

generate revenue or income


2. LIABILITIES The debts you OWE to

others, such as bank loans, accounts payable, and

mortgage loans.


3. EQUITY What the owners of the

business would have left over after selling all of the

assets and paying off all the liabilities.


1. ASSETS 2. LIABILITIES 3. EQUITY

These are all factors of

your asset strength. Along with the income

statement, it can indicate how effectively your

company’s assets are being utilized to produce return.


ASSET STRENGTH is a very good indicator of financial health. Because a company

can rely on its assets when things go wrong. Strong assets with few liabilities means a company can survive financially at times

of trouble or crisis.




If your company has 3 million EGP to be repaid in 60 days

and 8 million EGP in cash or assets that can be turned into cash within 60 days, the company is in good shape. If it is the

reverse....then things are not so good!!




If your company has 3 million EGP to be repaid in 60 days

and 8 million EGP in cash or assets that can be turned into cash within 60 days, the company is in good shape. If it is the

reverse....then things are not so good!!

Banks, investors, and analysts review a company’s balance sheet closely to determine the amount of risk involved in loaning money to,

investing in, or buying stock in the company. What they want to see is enough asset strength to cover all of the possible events that a

business is exposed to every day such as a downturn in the market

or failed launch of a new product.

Assets = Liabilities + Equity

The Balance Sheet Formula

Assets = Liabilities + Equity

The Balance Sheet Formula

Cash & Cash Equivalents + Other Assets = Total Assets － Total Liabilities = Total Shareholders’ Equity

The balance sheet shows a company’s assets and the sources of capital (cash) used to acquire or fund those assets, The balance sheet “balances” because it shows that the money

to purchase the assets came from (balances with) the total of what was borrowed (liabilities) plus what was earned or contributed from the owners’ pockets (equity).

Reading a Balance Sheet in Minutes

4Reading a Balance Sheet in Minutes

Cash Position Cash Position Change Equity Ratio Return on Assets (ROA)

If you only have a couple of minutes to look at a balance sheet, quickly look for the following four:

Cash Position A company’s cash position is the item listed as “Cash and Cash Equivalents”. This reflects how much cash the company has on hand or in accessible accounts at a point in time. You want to see a strong cash position on the balance sheet, this means that the company can

survive tough times. The worse the economy the more important the cash position becomes.




Cash Position Change Look for how the company’s cash position has changed over the years. An increase is a usually a good thing, unless the company is keeping too much cash, as that represents lost opportunities and not enough investments in growth, also cash produces a very low return.

If the cash position has decreased, why has it decreased? Has the company used cash for big investments? Or have revenue and profits declined, forcing the company to dig into its cash reserves to sustain itself?




Cash Position Change Look for how the company’s cash position has changed over the years. An increase is a usually a good thing, unless the company is keeping too much cash, as that represents lost opportunities and not enough investments in growth, also cash produces a very low return.

If the cash position has decreased, why has it decreased? Has the company used cash for big investments? Or have revenue and profits declined, forcing the company to dig into its cash reserves to sustain itself?

Equity Ratio Divide the Total Equity by Total Assets and multiply by 100 to get the Equity Ratio. A higher percentage means that the company relies on its owners’ equity to finance its assets. A higher percentage also means the company has more equity to borrow against in case it

wishes to use loans to finance itself.


Return on Assets (ROA) ROA is a measure of profit generated on the company’s assets. Divide the Net Income by Total Assets and multiply by 100 to calculate the ROA. The higher the percentage the better, profits are the best kind of return!


Let us take a look at a real balance sheet that is very relevant to you.

The following is an excerpt from Etisalat Group Annual Report for Year 2012.

Balance Sheet Example

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Now that you have taken a quick look at a balance sheet example, let

us break down the major components of a balance sheet.

The following is an excerpt from Etisalat Group Annual Report for Year 2013.

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non-current assets These are assets that are fixed or long-term. These assets are not intended to be turned into cash in the next twelve months. A company with more cash than it needs in the short term

will look for ways to invest it for higher return in longer term assets.

current assets These are assets that the company expects to convert to cash within the next twelve months. As we learned before, cash is the most liquid asset. It includes funds in banks and other

financial accounts, as well as cash equivalents such as interest in a money market fund. As a general rule you want to see cash increasing over time, unless the company makes a strategic decision to use cash in

investment opportunities, paying dividends to shareholders, or maybe paying bonuses to employees.

non-current liabilities Are the financial obligations that extend beyond twelve months, such as long term debt.

current liabilities These are the liabilities to be paid within twelve months. An important question when reviewing current liabilities is “are there enough current assets to cover all current liabilities?”. Although liabilities are necessary in most companies to finance and grow operations, too many liabilities can be troublesome. More liabilities mean greater interest payments, and interest payments impact the bottom line.

equity

Equity is used to calculate several ratios. One of the most important is the Equity Ratio which measures equity as a percentage of assets. A high equity ratio suggests that a company has

a lot of equity to borrow against if it needs to raise cash. Another is the debt-to-equity ratio, which is total liabilities divided by total equity.

Points to remember about the balance sheet  The balance sheet is a snapshot taken at the end of a month, quarter, or year.

It is used in comparing the financial status of the company between two snapshots (two specific points in time).


It is used in comparing the financial status of the company between two snapshots (two specific points in time).  The balance sheet formula is Assets = Liabilities + Equity


It is used in comparing the financial status of the company between two snapshots (two specific points in time).  The balance sheet formula is Assets = Liabilities + Equity  The balance sheet primarily measure a company’s financial strength. It has a particular focus on liquidity and ratios of debt to equity and assets.



 The balance sheet must balance the amount of assets with the source of funds to acquire them, that is the liabilities coming from creditors plus equity coming

from the owners.




from the owners.  Keys to look for in a balance sheet include: cash, current assets, total assets, current liabilities, total liabilities, and equity.





 Net income from the income statement, divided by total assets on the balance sheet is what is called: Return on Assets. (ROA), which is a measure of

productivity.






productivity.  Equity is equal to assets minus liabilities. Equity is generated through

shareholders investing in the company and by profit being retained by the

company.






productivity.  Equity is equal to assets minus liabilities. Equity is generated through

shareholders investing in the company and by profit being retained by the

company.  Debt to equity ratio indicates how much debt is used to finance the growth of

the company over time.

to positively influence your company’s balance sheet:

What you can do....  Reduce or eliminate nonproducing assets

 Acquire more effective assets  Make better use of, or conserve, cash  Negotiate better terms on credit or debt  Improve profitability using existing assets

leading business online module - balance sheet

Business

companys assets

strong assets

companys balance sheet

total assets total liabilities

liabilities equity

good shape

asset strengthis

sources of capital cash