Balance Sheet: Structure, Components, and How to Understand It Correctly

In the current investment environment filled with variables and uncertainties, investment decisions should not rely solely on intuition or personal opinions. Numerical data and factual information are essential tools for investors. The financial statements are a key aid that reflect the financial position resulting from a company’s activities, whether quarterly or annually. Let’s see what this important document includes.

What does the Financial Statement mean?

Financial Statement (Financial Statement) is a financial document that summarizes numerical data about a company’s financial position. It is used to analyze operational performance and the company’s resource management capabilities. The figures for profit or loss, cash flow, investments, liabilities, and the value of various assets all appear in this document.

Besides using the financial statement to comply with legal requirements, companies can also utilize this information to assess profitability, develop marketing strategies, or make decisions about business expansion.

The 3 main documents that comprise the financial statement

1. Balance Sheet (Balance Sheet)

If you want to know the total value of a company’s assets, who it has borrowed from, and the net worth of shareholders, the answer is in the balance sheet. This document provides a snapshot of the financial position at a specific date, such as December 31, 2567, by comparing total assets, total liabilities, and equity.

2. Income Statement (Income Statement)

Want to know how much profit or loss the company made over a period? This information is in the income statement. It shows total revenue, various expenses, and the bottom line—net profit or loss. It also helps management calculate taxes owed and plan expense management to reduce taxes.

3. Cash Flow Statement (Cash Flow Statement)

Where does the company’s cash come from and go? The cash flow statement shows the sources of cash—whether from operations, investments, or borrowing—and indicates how that cash was used. This document helps managers see liquidity and the company’s true profitability.

Two additional supplementary documents

Statement of Changes in Equity (Statement of Changes in Equity)

Indicates changes in the company’s equity, such as issuing new shares, share buybacks, dividend payments, or retained earnings. All these factors affect the company’s equity.

Comprehensive Income Statement (Comprehensive Income Statement)

By studying the comprehensive income statement, investors can examine details such as increases or decreases in revenue, unusual expenses, cost control, EBITDA, earnings per share, and other risks that may impact performance.

Advantages and disadvantages of using the financial statement

Useful information for investors

1. Clear view of financial position - Can assess the company’s strength by looking at its debt-paying ability and overall financial health.

2. Better investment decisions - Numerical data aids analysis, helping select high-quality and promising stocks.

3. Performance tracking - Understand where profits come from and how assets and liabilities are managed.

4. Growth planning - Identify strengths and weaknesses and find opportunities for business expansion.

( Limitations to be aware of )

1. Complex data - For those without accounting background, reading and understanding financial statements can be difficult, especially for large companies.

2. Data accuracy - Sometimes data may be revised or contain recording errors.

3. Numerical data only - Cannot reflect qualitative issues or other business complexities.

4. Changes due to laws - Year-to-year data may not be directly comparable due to legal updates.

How to analyze the financial statement

When reading the balance sheet, ask yourself:

• What is the total value of assets?
• What is the total amount of liabilities?
• What is the net worth?
• What is the debt-to-asset ratio?

When reviewing the income statement, check:

• Has total revenue increased or decreased compared to last year?
• Are there any abnormal expenses?
• Is net profit up or down?
• What is the profit margin?

When examining the cash flow statement, observe:

• Is cash from operations increasing or decreasing?
• Are there new investments?
• Has the company paid off debt or borrowed?
• What is the cash position?

Where can you find the financial statements?

Company website - The Investor Relations section usually provides all financial reports.

Financial data portals - Investing.com, Bloomberg, Reuters, Yahoo Finance, Google Finance offer comprehensive data, charts, and summary tables.

Analyst reports - Market experts write comparative analysis reports on multiple companies.

Financial institution databases - Banks and financial agencies often provide Equity Research and additional data.

Investors rely on financial statements for

Assessing financial capability - To see if the company has a strong financial base and can pay debts.

Pre-investment decision-making - To have clearer fundamental data for choosing whether to invest or avoid.

Performance evaluation - To understand profit-generating ability and resource management.

Risk management - To identify financial variables that could impact the company and plan accordingly.

Monitoring management performance - To see how well executives create value for shareholders.

Choosing tools for effective investing

After studying the financial statements, investors can invest through various methods such as:

1. Direct stock investment - Buying and selling stocks through a broker as usual.

2. Contract for Difference (CFD) - Offers greater flexibility with high leverage possibly up to 1:20. Investors can trade both upward and downward, making profits from falling prices.

3. Diverse tools - CFDs enable small- to medium-sized investors to trade without large capital, as leverage increases purchasing power.

4. Short selling via CFDs - Allows immediate selling of stocks with downward trends without additional costs or restrictions.

However, investors must understand that high leverage also means higher risk; potential profits can be amplified, but so can losses.

Summary

Studying and understanding financial statements is a vital skill for modern investors. Whether analyzing before investing, planning business growth, or assessing overall financial health, companies or organizations without an accounting team can delegate the preparation and review of financial statements to accounting firms to ensure accurate data and valuable insights.