A Balance sheet is a statement of the assets, liabilities, and capital of a business or

other organization at a particular point in time, detailing the balance of income and
expenditure over the preceding period.
How the Balance Sheet Works:
The balance sheet is divided into two parts that, based on the following equation,
must equal each other, or balance each other out. The main formula behind balance
sheets is:

Assets = Liabilities + Shareholders\' Equity

Types of Assets
Current Assets
Current assets have a life span of one year or less, meaning they can be converted
easily into cash. Such assets classes include cash and cash equivalents, accounts
receivable and inventory.

Non-Current Assets
Non-current assets are assets that are not turned into cash easily, are expected to
be turned into cash within a year and/or have a lifespan of more than a year. They
can refer to tangible assets such as machinery, computers, buildings and land. Noncurrent assets also can be intangible assets, such as goodwill, patentsor copyright.
While these assets are not physical in nature, they are often the resources that can
make or break a company - the value of a brand name, for instance, should not be
underestimated.

Different Liabilities
Like assets, they can be both current and long-term. Long-term liabilities are debts
and other non-debt financial obligations, which are due after a period of at least one
year from the date of the balance sheet. Current liabilities are the company's
liabilities that will come due, or must be paid, within one year. This includes both
shorter-term borrowings, such as accounts payables, along with the current portion
of longer-term borrowing, such as the latest interest payment on a 10-year loan.
Shareholders' Equity
Shareholders' equity is the initial amount of money invested into a business. If, at

the end of the fiscal year, a company decides to reinvest its net earnings into the
company (after taxes), these retained earnings will be transferred from theincome
statement onto the balance sheet and into the shareholder's equity account. This
account represents a company's total net worth. In order for the balance sheet to
balance, total assets on one side have to equal total liabilities plus shareholders'
equity on the other.

INVESTOPEDIA EXPLAINS 'DEBT/EQUITY RATIO'

A high debt/equity ratio generally means that a company has been aggressive in
financing its growth with debt. This can result in volatile earnings as a result of the
additional interest expense.
If a lot of debt is used to finance increased operations (high debt to equity), the
company could potentially generate more earnings than it would have without this
outside financing. If this were to increase earnings by a greater amount than the
debt cost (interest), then the shareholders benefit as more earnings are being
spread among the same amount of shareholders. However, the cost of this debt
financing may outweigh the return that the company generates on the debt through
investment and business activities and become too much for the company to
handle. This can lead to bankruptcy, which would leave shareholders with nothing.

INVESTOPEDIA EXPLAINS 'WORKING CAPITAL'

If a company's current assets do not exceed its current liabilities, then it may run
into trouble paying back creditors in the short term. The worst-case scenario is
bankruptcy. A declining working capital ratio over a longer time period could also be
a red flag that warrants further analysis. For example, it could be that the
company's sales volumes are decreasing and, as a result, its accounts receivables
number continues to get smaller and smaller.Working capital also gives investors an
idea of the company's underlying operational efficiency. Money that is tied up in
inventory or money that customers still owe to the company cannot be used to pay
off any of the company's obligations. So, if a company is not operating in the most
efficient manner (slow collection), it will show up as an increase in the working
capital. This can be seen by comparing the working capital from one period to

another; slow collection may signal an underlying problem in the company's

operations.

This section of the tutorial discusses the different measures of corporate

profitability and financial performance. These ratios, much like the operational
performance ratios, give users a good understanding of how well the company
utilized its resources in generating profit and shareholder value.
The long-term profitability of a company is vital for both the survivability of the
company as well as the benefit received by shareholders. It is these ratios that
can give insight into the all important "profit".
The third series of ratios in this tutorial are debt ratios. These ratios give users a
general idea of the company's overall debt load as well as its mix of equity and
debt. Debt ratios can be used to determine the overall level of financial risk a
company and its shareholders face. In general, the greater the amount of debt
held by a company the greater the financial risk of bankruptcy.
This section of the financial ratio tutorial looks at cash flow indicators, which
focus on the cash being generated in terms of how much is being generated and
the safety net that it provides to the company. These ratios can give users
another look at the financial health and performance of a company.This last
section of the ratio analysis tutorial looks at a wide array of ratios that can be
used by investors to estimate the attractiveness of a potential or existing
investment and get an idea of its valuation.
However, when looking at the financial statements of a company many users can
suffer from information overload as there are so many different financial values.
This includes revenue, gross margin, operating cash flow, EBITDA, pro forma
earnings and the list goes on. Investment valuation ratios attempt to simplify this
evaluation process by comparing relevant data that help users gain an estimate
of valuation.
For example, the most well-known investment valuation ratio is the P/E ratio,
which compares the current price of company's shares to the amount of earnings
it generates. The purpose of this ratio is to give users a quick idea of how much

they are paying for each $1 of earnings. And with one simplified ratio, you can
easily compare the P/E ratio of one company to its competition and to the market.