Definition: The balance sheet is a snapshot of a company's financial position at a specific point in time, detailing what it owns (assets) and what it owes (liabilities).
Key Components:
Assets: What the company owns (goods, cash, inventories, receivables).
Equity and Liabilities: What the company owes to shareholders and creditors.
Structure of the Balance Sheet
Double-Entry Principle:
Assets = Equity + Liabilities
This indicates that every financial transaction affects both sides of the balance sheet.
Types of Assets
1. Fixed Assets (Non-current assets)
Intangible Assets: Patents, trademarks, goodwill.
Tangible Assets: Land, buildings, equipment.
Financial Assets: Long-term investments, loans to other entities.
2. Current Assets
Inventories: Raw materials, finished goods.
Receivables: Money owed to the company, such as trade receivables.
Cash/Equivalents: Liquid assets that the company can readily use.
Depreciation and Amortization
Depreciation: Allocates the cost of tangible assets over their useful lives.
Amortization: Similar to depreciation, but for intangible assets.
Formula: Asset at net value = Asset at book value - (Depreciation + Amortization).
Methods of Depreciation:
Straight-Line: Uniform allocation of cost.
Declining Balance: Accelerated depreciation in early years.
Economic Depreciation: Based on actual usage.
Equity and Liabilities
Equity Sources:
Share Capital and Premium
Retained Earnings
Net Income
Liabilities Sources:
Provisions
Financial and Bank Debt
Trade Payables
Equation Overview
Assets - Liabilities = Equity
Book Value vs Market Value of Equity
Book Value: The value the company reports in its financial statements.
Market Value: The current market capitalization (the price investors are willing to pay).
Price-to-Book Ratio (PBR):
PBR = Market Value of Equity / Book Value of Equity.
Indicates growth opportunities.
Net Debt and Financial Leverage
Definitions
Net Debt: Financial & Bank Debt - Cash - Marketable Securities.
Financial Leverage: Financial Net Debt / Equity.
Leverage Types
Gross Leverage: Based on total financial debt.
Book Value Leverage: Based on book value.
Market Value Leverage: Based on market value.
Working Capital (WC) and Net Working Capital (NWC)
Definitions
Working Capital: Long-term funds - Non-current assets.
Net Working Capital (NWC): Current Assets - Current Liabilities.
Importance
NWC is essential for funding operations; positive NWC indicates that current assets can meet current liabilities.
Economic Capital and Market Value of Economic Assets
Economic Assets: Equity + Net Debt.
Market Value: Total market value of the company's equity plus any net financial debt.