The balance sheet

The balance sheet is a photograph of one day. That is both its usefulness and its weakness, and chapter 11 is about how much a company can arrange around the shutter.

The identity

assets = liabilities + equity

Everything the company has was paid for by someone: lenders or owners. Equity is the residual — what is left for shareholders after everyone else is satisfied, which is chapter 1 of the equity subject seen from the company's side.

It balances always, including when a business is failing.

Assets

Split into non-current (expected to be held beyond a year) and current (expected to turn into cash within one).

Property, plant and equipment. Land, buildings, machinery, at cost less accumulated depreciation. The depreciation is an estimate: the company chose the useful life, within rules.

Goodwill. Created when a company buys another for more than the fair value of its identifiable net assets. Goodwill is the premium paid, sitting on the balance sheet as an asset.

Worth being blunt. Goodwill is not something the company owns and could sell. It is a record of a past decision. Large goodwill means large acquisitions, and whether that created value is answered by chapter 9's returns on capital rather than by the asset's presence. When an acquisition disappoints, goodwill is written down — an impairment — and the write-down is the admission.

Other intangibles. Software, brands, patents, licences, amortised over their lives. Note what is absent: a brand a company built itself generally does not appear, while one it bought does. Two identical businesses can show very different asset bases depending on whether they grew or acquired.

Investments. Stakes in other entities, including subsidiaries in standalone accounts. Chapter 2's reason for using consolidated figures.

Inventory and trade receivables. Goods not yet sold, and money owed by customers. These are chapter 11, and they are where a growing company's cash goes.

Cash and equivalents. The least ambiguous line.

Liabilities

Borrowings, current and non-current. The split matters: debt due within a year must be refinanced or repaid soon, and a company with large current borrowings and little cash has a timing problem regardless of how profitable it is. Chapter 12.

Trade payables. Money owed to suppliers — effectively interest-free funding, and chapter 11 is about whether stretching it is strength or stress.

Provisions. Amounts set aside for obligations whose timing or size is uncertain: warranties, employee benefits, disputes.

Deferred tax. Timing differences between accounting and tax treatment.

Equity

Share capital at face value, which is an arbitrary historical number and tells you nothing.

Other equity — mostly retained earnings, the accumulated profits never paid out. This is the line that grows when a company earns and retains, and it is the "book value" of chapter 19.

A company can have negative equity if accumulated losses exceed what was put in. It is solvent only as long as its lenders remain willing.

What a single date hides

The number people quote is debt, and debt is a photograph.

A company can repay borrowings just before the year end and draw them again afterwards. Both the repayment and the redrawing are legitimate; the balance sheet shows one of them. The same applies to cash, receivables and payables.

Three defences, none requiring special access.

Read three years side by side. A pattern is harder to arrange than a point.

Check the quarterly balance sheets. Half-yearly figures exist and are filed. A year-end figure far below the mid-year one is worth a question.

Cross-check against the cash flow statement. Interest paid is a cash figure; if it looks large relative to reported year-end debt, the debt was higher during the year than on the last day. Chapter 6.

The three questions

Everything else in this subject reads the balance sheet against something.

Is it earning enough on this? Operating profit over capital employed. Chapter 9.

Can it pay what it owes? Debt against cash flow, not against assets. Chapter 12.

Where is the money tied up, and is that growing faster than sales? Chapter 11.

The point

Assets equal liabilities plus equity, always, including in a failing business. Goodwill records a past acquisition rather than something saleable, and self-built brands are invisible where bought ones are not. It is a single date that a company can arrange, so read three years and cross-check against the cash flow statement.