A:

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.

RELATED FAQS
  1. What kinds of liabilities appear on the balance sheet?

    Learn what current and non-current liabilities are, the difference between the two, and examples of liabilities that a company ... Read Answer >>
  2. Does the balance sheet always balance?

    Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Answer >>
  3. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  4. How do you calculate working capital?

    The formula for calculating working capital is straightforward, but lends great insight into the shorter-term health of a ... Read Answer >>
  5. How does additional paid in capital affect retained earnings?

    Find out how additional paid-in capital can impact a company's retained earnings, including an explanation of both financial ... Read Answer >>
  6. What's the difference between an income statement and a balance sheet approach?

    Understand more about the principle purposes and primary differences between a company's income statement and its balance ... Read Answer >>
Related Articles
  1. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  2. Investing

    How To Read Apple's Balance Sheet

    We explain how to find, read, and analyze a balance sheet from Apple.
  3. Investing

    Explaining Noncurrent Liabilities

    Noncurrent liabilities are financial obligations a company owes a year or more into the future.
  4. Investing

    Current Liabilities

    Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
  5. Personal Finance

    How To Improve Net Worth By Decreasing Liabilities

    Here's an analysis of how to adjust liabilities and assets to improve net worth.
  6. Investing

    How Dividends Affect Stockholders' Equity

    Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
  7. Investing

    Evaluating Your Personal Financial Statement

    Determine your net worth by making your own cash flow statement and balance sheet.
RELATED TERMS
  1. Other Long-Term Liabilities

    A balance sheet item that includes obligations which are not ...
  2. Liability

    Liabilities are defined as a company's legal debts or obligations ...
  3. Noncurrent Liabilities

    A business's long-term financial obligations that are not due ...
  4. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  5. Financial Statements

    Records that outline the financial activities of a business, ...
  6. Other Current Liabilities

    A balance sheet entry used by companies to group together current ...
Hot Definitions
  1. Straddle

    An options strategy in which the investor holds a position in both a call and put with the same strike price and expiration ...
  2. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  3. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  4. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  5. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  6. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
Trading Center