02. How to read the balance sheet?
The balance sheet shows the numbers in a certain moment of time. In most cases it shows the status of assets and liabilities at the end of the year. There are also many companies around who have their year ending not at December 31, but for instance at September 30, each year. The internal reporting shows the balance sheet at the end of each months.
When I read the balance sheet, I read every number and the related text to it. I read slowly and try to imagine what that number tells me and how high or low it is in relation to other numbers. Numbers show always both: an absolute number and a relationship with another number. When reading a balance sheet it helps to read and remember both.
The fact that the balance sheet shows a status of development in a certain moment in time, I need to read several balance sheets next to each other. In many cases in an annual report at least the last year before is also shown. In such cases I can immediately see - for instance the equity - whether it has increased, or decreased. If it has increased from one period to the other a profit has been made and a part, or all of the profit has been added to the equity. If it has decreased a loss has been made and a part of the equity has been used to finance the loss.
The equity shows how self-sustainable a company is. It is important to check also the amount of cash available. Equity without the cash at hand is not enough. If I made a loss withe company I need to be able to pay for salaries and other cost with the cash at hand. Equity and cash will never be the same amount, but they need to be related to each other in order to judge about the strength of a company.