How To Analyze a Balance Sheet

hey everyone so I have been getting asked a lot recently if I could show you guys how to properly look through a company's balance sheet so in today's video that is exactly what we are going to be doing but first I want to let you guys know what a balance sheet actually is so a balance sheet is one of three financial documents that companies have to report to the public and the purpose of a balance sheet is to show you the financial strength of a business the balance sheet shows you the assets the liabilities and the total shareholder equity of the business and these three numbers and how they balance out is very important when you're looking at investing into a new business so the best free place to go and take a look through company's balance sheets that I found at least is Yahoo Finance so I'm someone who learns best by having something thrown at to me and putting it into a practical use so I'm just going to show you guys directly on the computer how I go through balance sheets what I'm looking for and really how to read them so let's just hop into the computer now and I'll show you guys some real-world case studies so that we can get a better idea of how to actually read a balance sheet okay so when we go to Yahoo Finance this is the home page and all you have to do is go up to the search bar up here and type in either the company or the ticker of the company that you want to take a look into so for example let's just look into Delta Airlines today or a DAL since I have been covering them recently on my channel so when we type in da L this is the page that will be brought up and this page has a lot of financial information about the business but today we're just going to be focusing on the balance sheet so to get to the balance sheet all you need to do is hit financials right here and then go to the balance sheet and we do have the option to look at the annual balance sheet or the quarterly reported balance sheet and their quarterly reported one will just break down all over the recent reported quarters but today I want to focus on the annual balance sheets so we can see here at the top we have a breakdown of the company's total assets so what assets are cash investments and everything that the business owns that can be liquidated into cash so think about your own personal assets you may own a house a car money and maybe some investments of your own even your furniture anything that can be liquidated into cash is an asset that you own and the same thing applies for businesses so now let's just take a look at deltas balance sheet so we can see that Delta has current cash and cash equivalents of two point eight billion now some of you guys might be thinking isn't this 2.8 million but if we look up here we can see that all numbers are reported in thousands so this is really 2.8 million thousand which is actually 2.8 billion that's essentially what's going on here so sometimes other companies will have other short-term investments and there will be a number right here and then the cash and cash equivalents plus the short-term investments equals the total cash position of the company but now let's look at net receivables so Delta has 2.8 billion dollars in net receivables as well and what net receivables are is money that is owed to Delta so when you're looking at other businesses it's essentially just the money that is owed to the business that you're looking at and inventory is just the amount of stuff that the business owns and it's just the total dollar amount of that stuff so in Delta's case this could be airplane fuel or parts that they have for their airplanes and the total amount of fuel and airplane parts that Delta owns is worth 1.2 billion dollars and then all of these things will be added up to equal the total current assets and then right here I have the real definition of what current assets are and Google says cash and other assets that are expected to be converted to cash within a year so when we see this total current assets on a balance sheet it's essentially the amount of money that can be converted into cash within 12 months so now every other asset on the balance sheet is an asset that is not expected to be liquidated within the next year so we're taking a look for example at gross property plant and equipment this isn't reported as a current asset because Delta is not expecting to liquidate their planes or you know their buildings within the next 12 months so it doesn't belong in the current assets portion of the balance sheet so I hope that makes sense but anyways let's continue going so Delta has gross property plant and equipment totalling of 50 3.9 billion dollars but on their property plant and equipment they had depreciation of about 17 billion dollars so this depreciation goes against the total dollar amount of the actual property plant and equipment so when you minus the depreciation you get left with your net property plant and equipment and for Delta in this case it is thirty six point nine billion dollars so just think about depreciation on your car for example when you buy a new car with the next few years that car loses a lot of value just in depreciation and this depreciation right here is what Delta is reporting on the balance sheet so now let's take a look at goodwill and goodwill is one of the assets that warren buffett calls a soft asset because goodwill is not a real asset let's just go right to investopedia and see what goodwill actually is investopedia says goodwill is an intangible asset that is associated with the purchase of one company by another specifically goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed in the process the value of a company's brand name solid customer base good customer relations good employee relations and proprietary technology represent some examples of goodwill so when a business goes and acquires another business they usually pay quite a significant premium on that business so I'm just going to give you guys a very quick and easy example say a company's Book value is roughly worth 10 billion dollars and then the acquiring company wants to come in and buy that business but they decide to buy that business for 12 billion dollars that means that the acquiring company paid an extra two billion dollars in goodwill for the business that they purchased so this is why Warren Buffett sees goodwill as a soft asset because you can't really liquidate goodwill on a balance sheet because it's not really worth anything now that you've acquired the business and if we take a look at intangible assets these are also assets that Warren Buffett calls soft assets and this is because intangible assets are not physical assets so this is kind of like brand recognition brand names and things like that so again this is not a physical asset that can be converted into cash so just keep these two figures in mind when you're looking at a company's balance sheet an especially goodwill so when you add up all of these assets you get the total non current assets and for Delta we have a total of 56 billion dollars in non current assets and then at the bottom here we have the total assets so what the total assets are the non current assets plus the total current assets and that will give you the company's total assets but now let's go and take a look at liabilities on a balance sheet so liabilities are what the company owes essentially the amount of money that the company has to pay so think about your own liabilities you might have credit card debt or a mortgage these are things that you owe and these are your own liabilities so the top part of the liabilities will be the company's current liabilities and current liabilities is everything that is expected to be paid off within the next 12 months or within the next year so for example when we take a look at Delta's current debt we can see that they have 2.2 billion dollars worth of debt that they have to pay off within the next 12 months and then if we take a look at accounts payable what this number is is the amount of money that the business owes to creditors or suppliers so in Delta's case we can see that they owe 3.2 billion dollars to their creditors or their suppliers accrued liabilities are expenses that the business has that have not yet been paid so this is another form of debt and another form of a liability and in Delta's case we can see that they have 4.7 billion dollars worth in accrued liabilities deferred revenue is the amount of money that the business has received for services or products that have not yet been delivered so in Delta's case this is flights that have been pre booked or prepaid that the passenger has not yet flown on so Delta has received this money but the passenger has not yet flown on the plane and that is what deferred revenue is and then other current liabilities could be any number of things and if you want to find what all of these other current liabilities are you're actually gonna have to go to the company's specific balance sheet and see what all these numbers are Yahoo Finance just doesn't report everything so if you want to do more digging you have to go to the actual business's balance sheet so with all of these things added up we get the total current liabilities and in Delta's case they have just over 20 billion dollars worth of total current liabilities and then everything under the total current liabilities are the liabilities that are not owed within the next 12 months so this is kind of like long-term liabilities and we can see this right here with long-term debt and Delta has 8.8 billion dollars worth of long-term debt and then fir deferred taxes liabilities we have a definition right here from investopedia deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid so it's essentially the amount of tax that the business still owes and then deferred revenues is the same as the deferred revenues up here it's just deferred revenues on services that are not expected to be performed with in the next year so in Delta's case this is like pre booked flights that are for 2021 if that makes sense and then other long-term liabilities are just all of the other long-term liabilities that Delta has that Yahoo Finance doesn't want to specifically report so we have the total non current liabilities here of twenty-eight point nine billion and then when you add the current liabilities to the non current liabilities you get the total liabilities and in Delta's case this is 49 billion dollars so now let's go down to the very bottom at stockholders equity and retained earnings as the amount of net income the business generated after paying out all of its dividends and then under retained earnings we have accumulated other comprehensive income this is also known as OCI and what this is is unrealized gains or losses that the business experienced and then right here we have a very important number at the bottom and this is total stockholder equity and total stockholder equity is the number that balances out the balance sheet so I'll show you how we get this number so if we take Delta's total current assets of sixty four point five billion dollars and we minus their total liabilities of 49 billion one hundred seventy four million we get left with fifteen point three billion and this is what the total stockholder equity is it's essentially the assets minus the liabilities and the amount of assets that is left over and that amount of assets that is left over is the stockholder equity and then at the bottom here we have total liabilities and stockholders equity and this is just essentially all of the assets that the business owns the total assets okay so now that we have taken a look through the balance sheet and what all of these numbers mean how do we determine if this is actually a financially stable company one calculation that a lot of investors such as myself like to do is the total current assets divided by the total current liabilities so in Delta's case we can look at the total current assets of eight to forty nine and we can scroll down and divide this by the total current liabilities which is twenty two zero four and we get point zero four zero now I want to let you guys know that when investors are looking into businesses they like this number to be above one now I actually kind of chose a bad example here because airlines are very highly leveraged businesses and they usually carry a lot of debt on their balance sheets so let's go to Google because google has a very very good balance sheet and let's do all of the same calculations so let's take a look at Google's total current assets and they have 152 billion in total current assets like that's actually insane so let's take 152 billion 578 million and let's divide this by their total current liabilities and their total current liabilities down here is forty five point two billion so let's divide this by four or five two two and one and we get three point three seven so as an investor when you see three point three seven that is very very good you're usually at least one a ratio above one and a ratio above two is considered very good a ratio above three tells me that Google is not going to go out of business they have a lot of money and a lot of assets so essentially what I'm trying to say is the higher this ratio of current assets versus current liabilities the safer and less risky the business actually is and let's just think about the reason behind this so if Google's revenue completely stopped and the business just completely shut down right now it means that Google has enough current assets to pay off all of their total current liabilities over three times so that's what I mean by this business does not carry a lot of risk because they have more than enough assets to pay off all of their liabilities and be completely okay and that is essentially all you're doing when you're looking at balance sheets is you're just comparing the assets versus the liabilities and then trying to make a judgment on is this business okay are they risky or is this business way to over leveraged and they have way too much of debt so now I want to show you guys some other things that investors look for in the balance sheet so we can see here at the top that we have 2019 2018 2017 and 2016 so when you're investing into a business you want to see if the total current assets the total cash position and all of these other numbers have been growing in the right direction over the years so for example we can take a look at Google's cash position from 2016 and we can see that they had 86 billion dollars in cash in 2017 and went up to 101 billion 2018 went up to 109 billion and then 2019 and went up to a hundred and nineteen billion so we can see that over the years Google is growing their cash position and we can see that this is also the same for their total current assets in 2016 they had assets of 105 billion 2017 one hundred 24 billion 2018 135 billion and then 2019 152 billion so their assets are also growing in the right direction and we can do the same thing for the total current liabilities so we can see that in 2016 Google had sixteen billion dollars in liabilities 2017 was 24 billion 2018 is 34 billion and 2019 was 45 billion and this is kind of where your own judgment has to come into play because we're seeing that Google is taking on more debt every single year and this would be concerning if their total assets were not growing so for example if their total current assets were going down and down and down and their liabilities were going up and up and up then that tells you that there is a problem with the business because the debt is going up and the assets are going down so the company is moving in the wrong direction and when you're looking at these numbers you don't just want to be taking a look at the current liabilities the current liabilities are very good to pay attention to but you also want to take a look at the total liabilities versus the total assets so let's just do another example here so we can see that the total liabilities for Google are also increasing every single year but if we take a look at their total assets their total assets are also increasing significantly every single year so this tells me that Google's increased liabilities are not much of an issue because their assets are also growing significantly and on the last number that we really want to pay attention to on the balance sheet is the total stockholder equity because when you buy the business this is essentially how much equity you're getting as a shareholder and we also know from earlier on in the video that stockholder equity is the total assets minus the total liabilities so if your stockholder equity is going down over the years it means that the company is getting more liabilities than they are building assets so you really want the total stockholder equity to be continually increasing year over year and in Google's case that is exactly what is happening the total stockholder equity went from 139 billion and 2016 all the way up to 201 billion in 2019 so their stockholder equity is going up so based on the balance sheet everything with this business seems to be going in the right direction and this means that this is a business that you can then go on to take a look further into to see if you want to make a full investment now you don't get enough information from the balance sheet alone to decide if you want to invest into the business it's just one of the first things that I go and take a look into to see if this is a business that I could see myself investing into so basically what I'm trying to say is that if the financials don't check out then I don't even bother taking a further look into the company all right so that's gonna wrap up the video and I really hope this video helped you guys out I know that it was kind of a longer one but I wanted to go really in depth and line by line to try and explain everything that I read on these balance sheets if you guys did enjoy this video or you found it helpful all that I ask is that you please leave a like on the video it just really helps out my channel and I really appreciate it and if this is your first time on my channel and you want to stick around and see more content like this then please feel free to subscribe as well because that would be pretty awesome but with all that being said thank you guys so much for watching and I really hope to see you again in the next one

Channel: Daniel Pronk

Views: 326,875

Rating: 4.9784608 out of 5

Keywords: daniel, investing, stock market, learn, how to, calgary, buy, sell, Daniel Pronk, Learn To Invest, Investing Basics, How re read a balance sheet, balance sheet for beginners, balance sheet tutorial, balance sheet, balance sheet beginner, tutorial, financial statement tutorial, investing tutorial, investing basics, balance sheet basics, read balance sheet, beginner investing, balance sheet tips, investing tips

Id: 7THNE8xEcHk

Length: 16min 19sec (979 seconds)

Published: Tue Apr 14 2020