Learn to value a stock · Day 6 of 28

The balance sheet in five minutes

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Key idea: The balance sheet shows what a company owns, what it owes and what is left for shareholders. Debt changes what each share is worth.

The balance sheet is a snapshot on one date. On one side are assets: cash, money owed by customers, inventory, property and equipment. On the other side are liabilities, such as loans, bonds and bills to pay. What is left over is shareholders' equity, also called book value.

Two companies with the same profit can deserve very different share prices because of debt. Lenders get paid before owners. A business that owes a lot has less room for error: a bad year can turn into a crisis when interest and repayments fall due.

A quick check is debt-to-equity: total debt divided by shareholders' equity. Another is net cash or net debt, which is cash minus debt. A company holding more cash than debt has a cushion; one with heavy debt and shrinking profit is fragile.

Banks and insurers are a special case. Debt-like deposits and policies are their raw material, so they are judged differently, as you will see on Day 13.

Quick check

A company has $2 billion of cash and $5 billion of debt. What is its net debt?

Try the debt-to-equity calculator →

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