What you need to look out for in a balance sheet
To study any business and its performance, you have to study financial statements including profit and loss statement, balance sheet and cash flow statement.
November 14, 2011 / 11:41 IST
Aziz Dodhiya
Valueoperations.com As a value investor all my analyses are based on the performance of the business. To study any business and its performance, you have to study financial statements including profit and loss statement, balance sheet and cash flow statement.It is very important to understand balance sheets and how to interpret them. The few variables to be studied in any balance sheet are equity, borrowings and the notes explaining themEquity:The textbook definition of equity is assets minus liabilities.When you start a business, you will have to purchase assets like equipment, machinery etc and will have to take on debt (liabilities) to fund them and working capital for day-to-day operations.There is more to equity than it just being the difference between assets and liabilities. For accountants, the tangible equity represents what you would receive in the event of a business winding up.In reality, if a business is liquidated, it is unlikely that you will get the value mentioned in the books of the company. That is because a poor performing business will have to sell its assets at a loss.The above scenario changes the whole definition of equity. The other way to look at equity is that it actually tells you how much money you have put in than you can get out during liquidation. So if the networth of a company is increasing at certain percentage from previous year then make sure their profits are just not matching but creating additional rupee too on their investments.Debt:Finance professors tell you that a mix of debt and equity for any company is good and an economical way to maintain the cost of servicing the debt. A decade since leaving college, I am of the view that debt is simply bad. Like Warren Buffett, I too believe it is unnecessary. Many of you who are reading this and my friends and other analysts might disagree with me. There is a risk that a debt-laden company
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