Reading a balance sheet – a quick guide
Knowing how to read a balance sheet is important not only for anyone who manages a business and wants to keep up to date with its progress, but also for anyone wishing to invest in a new commercial venture, anybody interested in analysing a client’s financial situation and even those (employees) who just want to find out how their company is doing.
There are several different aspects which can be considered when reading and interpreting a balance sheet, such as for example:
- The economic aspect (to calculate earnings and spending);
- Fiscal (to calculate tax to be paid);
- Financial (to calculate amount of readily available liquidity a company possesses);
- Statutory (to be aware how to draft such a document)
- Industrial (to work out the company’s production capacity).
As far as the elements included on the balance sheet are concerned, let us mention the structure of the balance sheet itself and the so-called supplementary note:
- The balance sheet per se consists only of numerical values (amounts earned and for what, etc.) and is divided into the Statement of Assets and Liabilities (composition of company assets) and the Statement of Profit and Loss (the revenue and costs generated);
- The supplementary note, however, describes the content of the balance sheet, providing a detailed explanation of all the figures.
Now that we have outlined what a balance sheet is and how it is structured, let us find out how to read one: in the heading we can find the name of the company and the year in question. At the bottom is the item CE-26, which indicates company profits. Another important item is production value CE-A, which enables us to calculate how much business the company has done.
The figure CE-B-6…14 on the other hand, stands for the costs sustained, while the capital (PA-A-I), the reserves (PA-A-A-II….III) and the profits (PA-A-VIII,IX) generate the net assets, which correspond to the size of the company. Last in the list, but not least, is the liquidity column, identified by the item AT-C-IV.
In order to get a complete picture of the progress of a business, it is sufficient to read the balance sheet and make some comparisons. If, for example, we wish to find out the profitability, it is sufficient to work out the ratio between Revenues CE-A and Profits CE-26. The ROE corresponds to the ratio between the net profits and the company’s holding, while the ROI is the relation between the operational income and associated investments.
Translated by Joanne Beckwith
