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Fundamental analysts normally start by examining the balance sheet. This is because the balance sheet is a snapshot of the company's assets and liabilities at a single point in time, not spread over the course of a year such as with the income statement. Many experts consider the top line, or cash, the most important item on a company's balance sheet. Other critical items include accounts receivable; short-term investments; property plant and equipment; and major liability items. The big three categories on any balance sheet are assets, liabilities and equity, and there are important items listed in each category.

Important Assets

All assets should be divided into current and noncurrent assets. An asset is considered current if it can reasonably be converted into cash within one year. Cash, inventories and net receivables are all important current assets because they offer flexibility and solvency.

Cash is the headliner. Companies that generate a lot of cash are often doing a good job satisfying customers and getting paid. While too much cash can be worrisome, too little can raise a lot of red flags.

Important Liabilities

Like assets, liabilities are either current or noncurrent. Current liabilities are obligations due within a year. Fundamental investors look for companies with fewer liabilities than assets, particularly when compared against cash flow. Companies that owe more money than they bring in are usually in trouble.

Important Equity

Equity is equal to assets minus liabilities, and it represents how much the company's shareholders actually have claim to; investors should pay particular attention to retained earnings and paid-in capital under the equity section.

Paid-in capital represents the initial investment amount paid by shareholders for their ownership interest. Compare this to additional paid-in capital to show the equity premium investors paid above par value.

Retained earnings show the amount of profit the firm reinvested or used to pay down debt, rather than distributed to shareholders as dividends.

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RELATED TERMS
  1. Balance Sheet

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