Originally, the balance sheet is included in the first part of the quarterly financial statement. It represents a detailed image of the company’s financial status when published. The balance sheet includes the company’s assets, liabilities and shareholders’ equity which gives a clear idea on its book value. It is a known fact that it is not a good sign if the company’s liabilities outperformed its assets because that means that its losses exceeded the capital which could lead to the company’s bankruptcy or its inability to practice business. That’s not only what the company’s balance sheet could explain; it can also point out the sufficient amount of available assets that help in expanding its business through the acquisition of another company or to develop a new product or even resort to borrowing to maintain its operational activities. Reading the balance sheet enables the investor to know if there is additional excess shares, more than the market need, as a result of the management’s inaccurate assumption of the expected demand on the products. This could be a strong indicator that the company handles its assets badly. Although the numbers shown in the companies’ statement of financial position vary greatly, but the general framework of the statements of all companies remain united. It means that it is possible to compare the performance of two companies in two different sectors. It is possible to summarize the three elements which, as a whole, generate the balance sheet for a company as the following:
- Assets.
- Liabilities.
- Shareholders’ Equity.
Assets
Individuals own assets of great value such as real estate or jewelry. Similarly, companies can own assets as well. One of the differences between an individual and a company’s assets is the company’s obligation to publish what it owns to the public. Companies can own tangible assets such as computers, machinery, money and real estate. It can also have intangible assets such as trademarks, copyrights or patents. Generally, a company’s assets are categorized according to the ability to convert it into cash in two types:
1. Current Assets:
Cash and other properties owned by the company and could be easily converted into cash in one year. It is an important indicator of the company’s financial status because it is used to cover short term obligations of the company’s operations. If the company suffers from a decline in its current assets then that means it needs to find new means to finance its activities. One way is to issue shares. We can generally say that increasing the company’s current net asset means an increase in the company’s opportunities in maintaining its growth.
Some of the important current assets for companies:
- Cash and its equivalents.
- Short term investments.
- Payable sales.
- Inventory.
2. Non-current Assets:
Assets that the company owns and needs more than a year to convert into cash or it is the asset that the company does not have a plan to convert to cash during the next year. Fixed assets such as lands, buildings, machinery and so on, come under non-current assets. The importance of the company’s non-current assets volume is based on its sector’s type. For instance, companies in the banking sector don’t need (fixed) non-current assets compared to what a company in the industrial sector.
Liabilities
All companies- even those profitable- have debts. In the balance sheet, debts are called Liabilities. A company’s management successfulness is based on its ability to manage its various liabilities which are considered a part of its business.
Examples of a company’s liabilities:
- Debt of suppliers and shareholders.
- Payable Expenses.
- Long-term loans.
- Zakat.
A company’s liabilities in the balance sheet are divided into two parts:
1. Current Liabilities:
The commitments the company should pay in no more than one year. The company usually refers to liquidating some of its current assets to cover these expenses.
Some of the important types of current liabilities are:
- Payables.
- Undistributed dividends.
- Zakat.
Installments of long-term loans.
2. Long-term Liabilities:
The commitments the company is not restricted to pay within at least one year such as Long- term loans. Although theses debts are not to be paid through the next financial year, but at the end it should be paid. It is important to keep that in mind when evaluating the company.
Operating expenses
Information can be similar among all sectors. For example, an investor seeks to ensure that the company's costs are under control, and that its resources are managed efficiently. Taking a look on the operating expenses can with no doubt give a clear impression in this area as the operating expenses are supposed to increase more than the previous financial period, unless the company's revenue has risen as well.
Shareholders’ Equity
Shareholders’ equity is mentioned in the company’s balance sheet report. Shareholder’s equity equals the invested money that was distributed as shares plus the undistributed profits, which represents retained earnings held and re-invested by the company. They are not distributed to shareholders. To make it simple, shareholders’ equity finances the company’s business. The more equity the shareholders have, the size of the company’s own operational money increases. Shareholders’ equity is calculated in a balance sheet by subtracting total liabilities from total assets. For example, if the company’s total assets are 100 million Riyals while its liabilities are 75 million Riyals then the share holders’ equity equals 25 million Riyals.
(100 million – 75 million = 25 million Riyals)
Shareholders’ Equity = Total Assets – Total Liabilities
