How to Read a Balance Sheet

in this video we're gonna walk through a balance sheet in our last video we walked through an income statement if you didn't see that video I suggest that you either go back and watch it now or perhaps watch it after this one so in this video we're gonna use Nikes most recent balance sheet which was for November 30th 2017 now if you already watched our income statement video you may notice that we use annual numbers and in this one we're using quarterly numbers well the main reason we're doing that is because an income statement covers a series of transactions over a period of time while a balance sheet looks at a specific point in time so we want the most recent one so in our case we're looking at the balances of all of these individual line items as of November 30th 2017 which as of the recording of this video is the most recent filing okay let's get started the first thing that's important to know is how a balance sheet works a balance sheet by definition must balance out the formula is assets must equal liabilities and shareholder equity so in our example this 24 billion dollar number this must equal total liabilities plus total stockholder equity also note that I said 24 billion instead of 24 million because although this number says 24 million I can see that these numbers are all in thousands this asset section here is broken into two sub sections current assets and long-term assets current assets and current liabilities for that matter our items that are expected to be converted to cash within the next year within the next year is the key point here if you see current before other assets or liabilities you'll know it's expected over the next twelve months long term on the other hand is when it's greater than twelve months now that could be thirteen months away or it could be years and years and years so on this first line item there's cash and cash equivalents cash is either cash they have in the bank or perhaps in a money market fund anything that can be converted into cash immediately the next one short-term investments these investments that meet two primary criteria they can be converted into cash quickly and the company plans on converting it into cash within the next year this goes back to the one year current assets next is net receivables receivables are what are owned to the company so in the case of Nike if Nike sold a bunch of shoes to a shoe store and that shoe store has let's say 60 days to pay for it during that 60 days now that revenue will be classified as a receivable the reason they call it net receivables is because it needs to account for the possibility that Nike never gets paid maybe the shoe store goes out of business or some reason well using Nikes three point six billion dollar receivables number maybe that was 3.8 billion but they think 200 million will never be paid okay moving on to inventory once again this is exactly what it sounds like this is inventory that Nike holds that are expected to sell in the next 12 months now it's important to note that nitin inventory in this case is not just a bunch of shoes or clothing or something in Nikes ready to sell but it could also be all the raw material they have all of the work in progress shoes or clothing whatever it is other current assets refers to current assets that don't fall neatly into one of these categories this seems like a large number relative to other categories so I was curious I went over to the last quarterly filing where like where I got these numbers from and I found out that according to their footnotes they classified prepaid expenses in other current assets well let's imagine that you prepay for some service in advance that would fall into prepaid expenses total all of these up and you get total current assets okay long-term investments Nike isn't showing anything here but a good example of what this would be would be if the company owned shares or real estate or something like that that the company is holding as an investment and they expect to hold it for more than one year or maybe they expect to hold it forever property plant and equipment on the other hand is often called PP&E and these are tangible fixed ass that they are using in business operations versus and just an investment this includes things like land buildings machines vehicles things like that for Nike this is a 4.1 billion dollar number and it's reasonable size relative to their the size of their business you can see it's gradually moving higher here but it's not excessively high if on the other hand PP&E was a huge number they would call that a capital intensive business the capital intensive business is when the assets needed to run the business are excessively large compared to labour costs airlines would be a good example of that okay onto goodwill goodwill is generated when a company acquires another company so let's imagine that Nike was going to acquire another business that business has assets they have liabilities and let's pretend that Nikes going to pay a billion dollars for the business the company that Nike is buying has 900 million assets and a hundred million in liabilities so in theory they should be worth eight hundred million dollars but Nikes pay a billion why well the business they're buying has a brand and that's worth something since the brand is very difficult to quantify accounting rules say that you just look at the purchase price and take away net assets and what's remaining will be considered goodwill another important point here is Nikes brand people sometimes make the mistake of thinking that goodwill is the value of Nikes brand and that's not true in fact it's against the rules for Nike to assign a value to their brand and list it on the balance sheet that is why when a company gets acquired it's almost always for a premium compared to the current stock price because although Nike can't list a value of their brand if another firm wants to buy them out they're going to have to pay for that brand okay on to intangible assets intangible assets are assets that don't actually exist but still help with revenue this would include things like patents or trademarks copyrights things like that now this is similar to goodwill because Nike cannot generally count the value of their own intangible assets so if Nike files for patent the cost of that patent would be expensed and go right to the income statement but if they were to go out and acquire a trademark as an example then that could be added to intangible asset but let's imagine for a second that this number went down by 10 million every year it's likely that it would be a patent or something that expired and as time passes the company must reduce the value of that asset they call that amortization amortization is similar to depreciation except you amortize intangible assets and you depreciate tangible assets this next line here supports our point if there was an intangible asset that expired then we would have amortization building up right here okay onto other assets Nike doesn't appear to have anything here but the same the same is true here as it was before when things don't neatly fall into one of the categories they put them in other assets okay I want to deferred long-term assets these are deferred let's say tax assets tax benefits you can look at these as credits for taxes when they can be used at some future year now you know won't be over the next twelve months because otherwise would be a short term S you then we have total assets which adds all of these up okay now on to the liability section liabilities are what the company owes so accounts payable which is a liabilities version of accounts receivable this is accounts payable of bills that Nike has that they need to pay so same example before they have a supplier and they have 60 days to pay during that 60 days this would be an account payable we also know that they expect to pay within the next year because this number falls under current liabilities we can see that this number has been fairly consistent for Nike imagine this number jumped from five point five to ten billion well we would that would raise a red flag as I would suddenly start to worry about what happened that night isn't paying their bills what is going on but in our case it's been consistent and seems to be manageable okay short slash current long-term debt so this stuff falls into the current liability section so we know it's due over the next year they also point out that it's also tied to long term debt this means that this one point two three nine billion is the portion of long-term debt that is due in the next twelve months simple enough other current liabilities once again it's another category so you really got to look up in the footnotes they have nothing here so so I'm not too worried about it add all these up and you get total current liabilities it's also good to compare total current liabilities took total current assets ideally what total current assets to be higher and we could see that Nike has is well covered okay long to long-term debt long-term debt can be bonds that the company has issued or other long term debt that the company has taken up it looks a bit unusual that the debt hasn't changed much in each period so I went over to the annual filings to see what that looked like and we could see the debt has risen each of the past three years but not terribly so relative to the rest of their balance sheet so I'm not too concerned about it other liabilities okay once again something that doesn't fit into the one of these categories nothing there so it doesn't seem to be terribly interesting right now deferred long term liability charges this flipside of the deferred long-term liability assets most likely tied to future tax expenses now its long-term so we know that it's greater than 12 months away before they can take advantage of it or before they have to pay okay on to minority interest minority interest refers to the portion of the business that in this case Nike doesn't own so if nike bought let's say 80 percent of a business well a hundred percent of that company's financials are reported on Nikes financial statements that's why they call them consolidated statements but they don't own 20 percent of it well this is where that 20 percent would fall it's a minority interest if you come across a company with minority interest I'd recommend you read the footnotes because there are many ways to get to minority interest based on how much of the company you own or how much influence you have over the company and there's all sorts of rules and nuances around it so I'd recommend you look at the footnotes for that negative goodwill well here negative goodwill is sort of the other side of goodwill if Nike acquires a company for less than the net tangible assets well then you end up with negative goodwill this would in theory mean that they bought them for a great deal total all of these up and you end up with total liabilities you can compare total liabilities to total assets and try to compare the health of the company and it seems that they have a decent balance sheet so far ok coming down to the home stretch let's have a look at shareholder equity ok so once we get to equity if Nike had any warrants or preferred shares they would list those here as well but since they don't they just list common stock for common stock they have 3 million this is tied to shares issued by the company at par value so if you ever set up a corporation or have the option to set up what par value is for your company usually it's about 1 cent so let's pretend that Nikes par value is 1 cent if they issue a thousand new shares then common stock will rise up by 10 which is 1000 shares times 1 penny but Nike is currently trading at about 65 dollars a share so if they should have thousand new shares it would actually receive $65,000 which is the 1,000 shares times $65 per share so for the sake of understanding the balance sheet cash has risen by 65,000 when they issue the thousand new shares and we know that ten dollars went over to the common stocks section the rest goes here to capital surplus okay on to retained earnings retained earnings shows the profit of the company that was not paid out as a dividend now this is a cumulative number so in theory it should keep rising as long as the company remains profitable and it doesn't pay any dividends that is too much higher than profits well you can see that Nikes fell a bit why well included in Nikes retained earnings is any stock buybacks that the company did and they have done buybacks every quarter so each quarter it falls simple enough okay on to Treasury stock they show nothing here but Treasury stock comes from when the company buys that stock and saves it in their own Treasury these shares don't have any voting rights and they don't get dividends but technically they do count as share ownership of the company so we already covered capital surplus we'll just leave that okay other stockholder equity once again this is that other category I went to the footnotes to see what this was since it could be a lot of different things if falling in the other category it looks like they are losses that they have related to currently translations back to the US dollar this next item total stockholder equity it is the sum of all of these and finally net tangible assets this is just like it sounds it this is the tangible assets of the firm minus the intangible assets of the firm okay that just about wraps it up now every company is different and the rules are different for different for companies in the United States or using US GAAP or countries outside of the United States that generally follow IFRS or international financial reporting standards if you're ever not sure about the number the footnotes will probably explain it to you be careful when you're researching a company and comparing it to competitors and be sure that they're both reporting things in a similar fashion otherwise you might have to make adjustments to them okay thanks for watching we'll see in the next video we're going to take a look at the cash flow statement thank you if you have any questions about the world of investing any suggestions on videos please post in the comments below and please subscribe as we continue to update with new videos every week thank you

Channel: Learn to Invest - Investors Grow

Views: 83,466

Keywords: how to read a balance sheet, balance sheet tutorial, balance sheet walk through, balance sheet, balance sheet explained, balance sheet analysis, balance sheet example, financial education, investing made simple, how to analyze a balance sheet, how to analyze a company, financial statements, balance sheet analysis for beginners, balance sheet analysis tutorial, balance sheet walkthrough, balance sheet tutorial for beginners, balance sheet explained for regular people

Id: 70jyVPIH6Oo

Length: 15min 3sec (903 seconds)

Published: Fri Mar 30 2018