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Balance sheet analysis can reveal lot of important information about the company. A user of balance sheet if interpret the figures correctly than can safeguard his interests and protect himself against creative accounting practices.
Some of the key importance of balance sheet are;
It is a snapshot of company's assets, liabilities & equity on a given date. It is used by management, investors, bankers, creditors, rating agencies to understand the financial health of a company. If compared on year-on-year basis, it can give indications of company's performance over the years and also the likely trajectory of company's future growth. It is the minimum requirement for availing credit facilities from banking system. Users can interpret balance sheet to know the liquidity & leverage position of a company. It is used by investors to compare with other companies and to find out stocks good for value investing. It enables the credit providers to find proper utilization of funds by the company. It is used by regulators to ensure regulatory compliances. It is used by tax authorities to ascertain tax liabilities on the company. It is used by private equity investors, venture capital funds to ascertain value of company and to acquire stake at appropriate price. It is used by top management to ascertain, if the company is moving in right direction or needs some course correction.
The use of balance sheet and its interpretation is different for different user group and thus clarity & accuracy of the numbers used and their classification is very important. In this book, author has tried to elaborate basic structure of balance sheet along with classification of assets and liabilities of a company. The book provides commonly used tools for interpretation of balance sheet information for use by bankers and investors.
