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How to analyze the balance sheet of a listed company

The balance sheet is an accounting statement that reflects all the assets, liabilities and equity of a company at a particular date (month-end, year-end). Its basic structure is "assets = liabilities + equity". This accounting equilibrium is always constant regardless of the state of the company. The left side reflects the resources owned by the company; the right side reflects the claims of the different owners of the company to these resources. Creditors may have a claim on all the resources of the company, and the company is liable to the different creditors with all of its assets, and after all of its liabilities are paid, what remains is equity, the net assets of the company.

We use the information in the balance sheet to find out the distribution of assets, the composition of liabilities and equity, to evaluate whether the company's capital operation and financial structure are normal and reasonable; to analyze the company's liquidity or currency, the amount of long- and short-term debts and debt capacity, and to evaluate the company's ability to bear risks; to use the information provided in the table also helps to calculate the company's profitability and evaluate the company's business performance.

Before investor analyze the balance sheet elements, they should first take a look at the asset elements.

1. Current assets

Analyze the company's cash, various deposits, short-term investments, various receivables and payables, inventories, etc.. If current assets are higher than in previous years, it indicates that the company's ability to pay and liquidity is enhanced.

2. Long-term investments

The analysis of investments with a period of more than one year, such as the company's holding and the implementation of diversified operations. The increase of long-term investment indicates that the company's growth prospects are promising.

3. Fixed asset

This is an analysis of the assets in physical form. The fixed assets figures listed in the balance sheet only reflect the amout that has not yet been depreciated and is expected to generate cash inflow in future periods. We should pay special attention to make sure the depreciation & depletion is reasonable since it will directly affects the accuracy of the balance sheet, income statement and various other statements. Obviously, less depreciation will increase current profits, while more depreciation will reduce the current profit. The number could be manipulated by companies sometimes.

4. Intangible assets

The analysis covers trademark rights, copyright, land use rights, non-patented technology, goodwill, patent rights, etc.. Goodwill are not always reported, unless they are generated at the time of acquisition or merger. Upon acquisition of intangible assets, they should be recorded and amortized over a specified period of time.

Another aspect is liability which includes two aspects:

1. Current liability

Each current liability should be recorded according to the actual amount of occurrence. The key to analysis is to avoid omission. All liabilities should be reflected in the balance sheet.

2. Long-term liability

It includes long-term loans, bonds payable, long-term payables, etc.. Since long-term liabilities come in different shapes, investor should be taken to understand the company's creditors.

Finally, there is the analysis of shareholders' equity, which includes four aspects: shareholder euqity, capital euqity, additional paid-in Capital, surplus reserve and undistributed profits. The analysis of shareholders' equity focuses on understanding the different forms of capital invested in shareholders' equity and the shareholding structure, and understanding the priority order of liquidation of each element of shareholders' equity. When looking at the balance sheet, the income statement should not be left alone. Because they mainly involve capital profits and inventory turnover, the former being an indicator of profitability and the latter being an indicator of operating capacity.