Balance sheets - assets vs. liabilities

Before we delve into the other three financial statements let me stop and add a few caveats about financial ratios and financial statements.  Using either to compare one company with other similar companies can give you a good idea of the businesses’ financial health but differences in accounting methods make it difficult to get a true apples-to-apples comparison.

For example, if one company values its inventory using last-in, first-out (LIFO) and the other uses the average cost method then you can’t accurately compare their inventory valuations and cost of goods sold.  This is just accounting-speak for saying the one company assumes it sells or uses its newest inventory first, and that’s what gets reported, and the other company averages the cost of its entire inventory.  Neither way is wrong, and we don’t need to get bogged down in the details, I’m just making the point that you can’t come to an accurate conclusion about a company’s finances by looking at a few pieces of information.

The same holds true for financial ratios.  I started this series off by talking about ratios because they provide you with a good starting point of what to look at in greater detail.  They’ll raise some questions about a company’s performance but to get the answers you’ll need to do a little more digging.

Balance Sheets

The balance sheet is the financial statement that gives you a snapshot of the company’s financial position at the end of the reporting period.  The left side of the balance sheet lists assets (things the company owns) which are listed in order of liquidity, or the amount of time it takes the company to turn them into cash.  The right side lists the liabilities (things the company owes) which are listed in the order they have to be paid.  This statement is called the balance sheet because the assets and liabilities have to equal each other; the company’s assets is equal to what they own plus what they’ve borrowed.

Going back to our review of ABM Industries, Inc. (ABM) from the Samurai Fund if we look at their balance sheet at finance.yahoo.com we’ll see their current assets are made up of:

Cash and Cash Equivalents:          $34,153
Net Receivables:                            $528,803
Other Current Assets:                    $63,041
Total Current Assets:                      $620,997

The rest of their assets are made up of Long Term Investments, Property Plant and Equipment, Goodwill (intangible assets like the company’s brand or a good reputation), Other Assets, and Deferred Long Term Asset Charges which when added to the Total Current Assets give us Total Assets of $1,521,153.

Now we compare the assets to the current liabilities:

Accounts Payable:                         $341,629
Other Current Liabilities:               $1,065
Total Current Liabilities:                $342,694

To that we add the long term liabilities:

Long Term Debt:             $172,500
Other Liabilities:              $318,909
Total Liabilities:               $834,103

We have to add in stockholder’s equity, or the piece of the company owned by the shareholders,  to the company’s liabilities:

Common Stock:                            $517
Retained Earnings:                       $512,476
Capital Surplus:                            $176,480
Other Stockholder Equity:            ($2,423)
Total Stockholder Equity:              $687,050

Subtracting all the liabilities from the assets gives us Net Tangible Assets of $79,614. This is an increase from the $46,100 reported a year earlier but a big drop from the $329,006 they reported in 2007.  A quick scan of the previous year’s balance sheets shows us ABM added long term debts and other liabilities in 2008 and 2009, which may mean they made investments or acquisitions in those years.  Nothing to be overly concerned about but something we may want to revisit.

The important thing to take away from this is the balance sheet gives us a company’s net tangible assets, which is its assets less its liabilities and stockholders equity. The other thing to remember is the balance sheet is a snapshot in time of the company’s assets and liabilities, which are going to fluctuate from day to day.

In the next article we’ll cover the other two financial statements, retained earnings statements and the statement of cash flows. 

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You might also like to read:

1. How to analyze stocks like a pro
2. How to analyze stocks like a pro – part 5
3. How to analyze stocks like a pro – part 3
4. How to analyze stocks like a pro – part 2
5. 6 stocks for this economy – Part 2