A balance sheet is a financial statement summarizing a corporation's liabilities (debts), assets (valuables) and overall net worth at a single point in time. Investors examine the balance sheets of publicly-listed corporations for signs pointing to future growth or possible problems when making investment decisions.
Balance sheets take their name from the fact that a corporation's assets (on the left) must equal, or balance out, its combined right side of liabilities plus shareholders' equity. Assets are usually divided into current or liquid, meaning they can easiliy be converted to cash, and non-current assets that include things like machinery or goodwill. Assets are always listed down the page from most to least liquid while liabilities are listed from short-term to long-term.
Cash is King
Investors reading a company's balance sheet should focus primarily on its ability to creat liquid assets - the ultimate measure of shareholder value. The balance sheet, unlike earnings reports, will tell the investor whether the company is generating enough cash to keep funding growth and also whether it has too much money tied up in inventory or in arrears. The SEC's Edgar website distributes quarterly and yearly balance sheets for all listed companies.
Some corporations have used so-called "off-balance-sheet entities" to finance parts of their operations separately from the company's main business reporting requirements. These have fallen out of favor since the Enron scandal of 2001, although some commentators argue that they can still be employed as financing vehicles for investors who do not want to invest in a company's entire operations.
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- Off-Balance-Sheet Entities: The Good, The Bad And The Ugly. Investopedia - Forbes Digital.