The balance sheet on one page
What a company owns, what it owes to others, and why the difference between them is not the same thing as its value.
The three parts
Assets are everything the company owns: cash, goods in the warehouse, factories, patents and invoices customers haven't paid yet.
Liabilities are everything it owes to others: bank loans, bonds, its own unpaid bills and pension promises.
The difference is called shareholders' equity. If the company sold everything today at book value and paid off all its debts, that is the amount left over for you.
Why debt matters more than size
Debt isn't bad in itself — it's what lets a company build something it couldn't pay for out of pocket. The problem is timing.
A company with a large debt due next year is fragile. If credit markets freeze at exactly that moment, it can go bankrupt while still being profitable.
So look not just at how much debt there is, but at when it falls due and what it costs. Long, cheap debt is a completely different thing from short, expensive debt.
The numbers that aren't there
The balance sheet measures what can be measured. The brand, customer loyalty, the skill of the team and network effects appear nowhere.
That's why the most valuable companies in the world often have modest assets. Almost all of their value sits in things accounting doesn't know how to record.
The reverse is also true: a company with big factories can have an impressive balance sheet and a business that loses money every year.
Key terms in this lesson
- Assets
- Everything a company owns that has value.
- Liabilities
- Everything a company owes to others.
- Shareholders' equity
- Assets minus liabilities — what is left for shareholders on paper.
- Leverage
- How much debt a company uses. It multiplies profits and losses alike.
Quick check
Two companies have the same total debt. Which one is more fragile?
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