Welcome to Investing for Beginners podcast, this is episode 68. Tonight Andrew and I are going to talk about the balance sheet and give a kind of a brief overview of that. We’re also going to talk a little bit about some ratios that you can derive from the balance sheet.
This will be a great primer that you can use to look at 10ks, 10-qs and also kind of combine it with the cash flow statement analysis that we did a while back. Without any further ado I’m going to turn it over to Andrew and he’s going to start us off.
Andrew: so that cash flow statement episode you’re talking about that’s episode 17. We went super in-depth into that one but it was a good overview on the different financial statements and some of the key things you can kind of pullout from that. Last week we talked about basically earnings and what companies do when they get earnings.
We talked about how they can reinvest in the business they can hold the cash they can pay out dividends or they can do they can do share buybacks. The other thing they could do which I forgot to mention is they can use that cash and use those earnings to pay down debt.
And so I think that’s something we should focus on today. I am very anti debt I don’t like to invest in businesses that load on a lot of debt and so on the flip side of that when I see a stock where management has decided to aggressively pay down their debt.
They see using current profits you’re essentially you know not necessarily worrying too much about the short-term you’re really taking a long-term approach and so I really like that one that. When the stock is doing them the last eletter pick that just went out yesterday had a stock that really did that aggressively.
And so that’s something I like to see and I’ll kind of give an overview right so what the bounce she is how do you look at the bounce she obviously it’s very confusing but is there a way to for somebody who’s not an accountant some of these just an everyday person can they really understand what a balance she is I believe you can hopefully this episode will help you do that.
So turn it back to you Dave if you could break down the balance sheet and give us the simplest overview of what it is like if I had to pick three lines from the balance sheet that I want to know which they would be and why.
Dave: three main I guess compartments or you know yeah compartments is probably the easiest way for me to look at it it’s simply both goes down to assets liabilities and shareholders’ equity at a specific point in time.
So when you look at a balance sheet it’s actually a snapshot of what the company owns what it owes and what its worth at that particular time. So if we pick today which is August 2nd then the balance sheet of you know Company A would be have all those items listed in it.
So assets are simply things that generate money for the company whether it’s products whether its inventory whether it’s a physical building there’s all these different aspects that you can really dive into.
Liabilities is what you owe people so when you buy things you order stuff and you wait 30 days 60 days 90 days whatever it may be whatever your contract is to pay those back those are liabilities because those are monies that you have that you have to give to somebody for our product or service that you’ve purchased.
And then shareholders equity is what the equity of the company is worth and all those things add up into the balance sheet.
Now part of the sheet so when you look at a balance sheet the first thing you’re going to see are all the different assets and that includes cash and cash equivalents and all the other assets that we talked about.