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A balance sheet reveals a company’s assets and liabilities, along with the owners’ net worth. If you know how to read it, the balance sheet provides valuable information on a potential investment. Here are five tips to make the most of the numbers.

First, know the balance sheet equation. A balance sheet’s main formula is:

Assets = Liabilities + Shareholders’ Equity.

That means the resources a company uses to operate daily are the balance of its financial obligations plus its equity from shareholders and retained earnings.

Next are current assets. Current assets are those with a lifespan of a year or less. They’re usually items like cash and cash equivalents, accounts receivable and inventory. Accounts receivables include short-term obligations owed to the company by others.

Non-current assets cannot be quickly converted into cash, and have a lifespan of longer than a year. They can be tangible items like machinery and buildings, or intangible assets, like patents or copyrights.

Fourth are liabilities, which are financial obligations a company owes. They can be current debts owed within the next year, like utility bills. Or they can be long-term debts due beyond a year, like the interest on a 10-year loan.

And fifth, learn about shareholders’ equity, which is the initial money invested into the business. If, after the fiscal year, a company reinvests its net earnings into itself, retained earnings are transferred from the income statement onto the balance sheet into the shareholder’s equity account. Total assets on one side must equal the total liabilities and shareholders’ equity on the other.

Shareholders should also use formulas like the debt-to-equity ratio to gauge a company’s financial condition and operational efficiency.

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