How to Read a Balance Sheet

 How to Read a Balance Sheet A lot of beginner investors get a feeling that balance sheets are hard to read but there are a few key features that you can focus on in order to make it a lot simpler than it seems. If you want to determine the health of a company just look at their debt, cash on hand, and the number of shares in circulation. In general, debt and the number of circulating shares should be going down, while cash on hand should be increasing. If something seems odd be sure to take a closer inspection. Every quarter, companies are required to file a financial report. These can usually be found on their website in the financial section, but you can also look for them on financial websites like Yahoo Finance. If you are new to investing don't be fazed by the complexity of these reports. Once you get the hang of things they will be very easy to read and evaluate. #1 Cash & Cash Equivalents 💵 This represents the amount of cash a company has on hand. You should always compare it to the previous reports to see if the numbers are going up or down. Usually up is good and down is bad but that is not always the case. Companies can use this cash to pay off debt and pay dividends to investors or even invest to scale and grow the company. If the debt is going up that can be a bad sign but you will need to figure out why that is happening. If the company is borrowing money to make an investment that will earn even more in the long run, then debt isn't such a bad thing. #2 Long Term Debt 👛 This information can be found in the liabilities section and is a great indicator of the long-term health of a company. If the numbers are lower than last year, this means that the company is working toward eliminating its debt. This could indicate that management has a good grasp over the company and is willing to put extra efforts towards repaying their debt. Again, numbers may be bigger than last year if this cash is allocated toward a strategic investment that will benefit the company in the long run. #3 Total Shares Outstanding 💰 When looking into a balance sheet be sure to check the number of shares available in circulation. Preferably their number is constantly going down which is a very good sign for investors. When a company goes public they issue a certain number of shares to be sold to early investors. As the company grows it should have a buyback program that takes these shares off the market and puts it on the balance sheet. With younger companies, you can even see this number going up which isn't necessarily a bad sign but only if the company is putting that extra cash to good use. How to Read an Earnings Report? Understanding the value of earnings is probably the most important thing you should be doing before you get into investing. Everyone from the smallest investor to the CEO of a large corporation is obsessed with this number, but why is that? We will try to break it down as simply as possible. What Are Earnings? In simple terms, earnings represent the profit of a company. If a company is selling a product, you should subtract the costs of producing that item from the revenue generated by the sales to determine their earnings. It is good to know that this is just a simplified way to do the math because the accounting process is a bit more complex. If you are confused with many different terms used by investors, you should know that the terms profit, net income, bottom line, and earnings all refer to the same thing - earnings. Example of eToro earnings calendar Earnings Per Share This number may be a bit more tricky to calculate but it is not that complicated. Companies usually have a set number of shares circulating in the free market. To know how much the company is earning per share you should divide their total earnings by the number of shares outstanding. Here is an example of an EPS calculation. Company A has earned $1M in the past year and company B performed exactly the same but there is a slight difference. Company A has 1 million shares outstanding, while company B has only 500,000 shares outstanding. When we divide their earnings by the number of shares in circulation, we can conclude that company A has a $1 EPS while company B has a $2 EPS value. Why Are Earnings Important? 🤔 Earnings are the main factor driving stock prices. If a company is reporting high earnings, this usually implies a rise in the stock price and the same goes for underperformance but the price reacts in the opposite direction. A rising stock price indicates that investors are optimistic about future earnings but this may not always be the case. During the dot com bubble, there were numerous examples of investors making completely wrong assumptions. The internet boom made everyone optimistic about the upcoming technology so people were investing money into almost anything that had a connection with the internet. Prices were constantly going up and when reality hit the bubble burst completely. The vast majority of companies simply couldn't generate as much revenue as investors were expecting. Profitable companies have two ways of handling their profits. The first option is to reinvest in the product/service they are offering, improve it and try to generate even more revenue. In this scenario, investors will not get a share of profits but will probably benefit from the rising stock price. The second option is to do a buyback program and pay out dividends. While smaller companies will almost always reinvest profits to maximize investor returns, well-established businesses will share their profits with shareholders through dividends, if they don't have any immediate plans of reinvesting or a stock buyback