How to Decode the Balance Sheet?

A balance sheet is essential to evaluate a company's finances, but interpreting it can be overwhelming. Here are some key steps  to decode it:


A balance sheet consists of three main components - assets: what the company owns; liabilities: what it owes; and equity: shareholders' investment.

the Structure


Closely examine the fixed assets: the company's long-term resources, followed by current assets:  short-term resources that can be converted into cash within a year.

the assets


Moving on to liabilities, examine whether they are short-term or long-term. Short-term liabilities are due within a year, while long-term liabilities are due after a year.

the liabilities

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Next, evaluate the equity section. Look at the retained earnings and common stock to understand how much the company has earned and how much has been paid out in dividends.


the equity

Calculate key financial ratios

Finally, calculate key financial ratios such as the debt-to-equity ratio, return on assets, and current ratio, which can help determine the company's profitability, liquidity, and solvency.