Balance Sheet

A balance sheet shows what a company owns and owes at a specific moment. It splits into assets, liabilities and equity, and assets always equal liabilities plus equity.

Assets are what the company holds, liabilities what it must repay, and equity the difference — the genuinely owned portion. Buy a 500,000 house with a 300,000 loan and you have 500,000 in assets, 300,000 in liabilities, 200,000 in equity.

Its role differs from the income statement. If the income statement is a video of what was earned over a year, the balance sheet is a photograph of the position on one date.

What to look for is the scale of the debt and the cushion of cash. Excessive leverage makes a company fragile when rates rise, and current assets below near-term obligations bring a funding squeeze even while profits are reported.

Profitable companies that collapse suddenly usually started here. Watching only earnings and skipping the balance sheet is how mounting debt goes unnoticed. On a first read, simply checking whether equity keeps growing is enough. A company whose equity shrinks is losing more than it earns.