27 July 2018

The Balance sheet

The balance sheet is a list of (a) what a company owns less (b) what it owes with the balance being (c) the value that is attributable to shareholders.

by John Royden

Head of Research

Assets less Liabilities = Value of the Shares or Equity.

The example below shows assets of £120 million less liabilities of £70 million = £50 million of equity.

understanding finance

You can think of the value of shares as being a liability because if a company sold all of its assets, collected its receivables and paid off its debts, the balance is what the company would owe its shareholders or equity holders.

Different companies use different labels to describe their assets in different ways. Whilst the labels are more intuitive than acronyms like EBITDA, there are still a few descriptions that need to be unravelled. Most companies now talk about receivables and payables which I find easier than debtors and creditors.

Goodwill is when a company pays £100 million for a company with £60 million of assets in the balance sheet. Accountants just describe the difference of £40 million as goodwill.

One really important aspect is that the values in a balance sheet, often called book value, tend to be based on what a company paid for its assets more than what they are actually worth.

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