Financial Knowledge: Walking into the Balance Sheet (Part 1)

&Nbsp; The balance sheet mainly includes the following three categories: assets, liabilities, and owner's equity.

Before interpreting this report, let's first discuss the correlation between the following two major elements and these three types of projects:

oneMonetary elements

Monetary funds, commonly known as "money" or "cash". Most of the assets in the financial statements exist for the purpose of being converted into "money" in the future. Simply put, those that can be directly converted into money are monetary assets, such as accounts receivable or short-term investments, while those that can be indirectly converted into money are called non monetary assets, such as inventory, fixed assets, or intangible assets.

Most of the "killers" in the statements that may "suck" the enterprise's cash in the future exist in the form of liabilities, such as accounts payable, employee compensation payable, loans, etc., and most of them are the realization of contractual obligations.

Equity is a benchmark that corresponds to the interests of investors. There are usually three ways for investors to truly convert their equity into cash: first, to sell their equity, that is, to sell stocks; Secondly, cash dividends, i.e. receiving dividends; Thirdly, liquidation, that is, splitting up and distributing property.

Regardless of the business model, the basic form of enterprise existence is always to exchange money or liabilities for assets, and then to maintain its business operations by converting assets into money. When the amount of money paid is less than the amount of money obtained from asset conversion, the owner's equity (shareholder's interest) increases, and vice versa, it decreases.

twoTime element

Time generates value, but it also breeds risk. On the one hand, by developing new products and establishing a good market position and reputation within a certain period of time, enterprises may convert their inventory or fixed assets into incremental cash; On the other hand, once a company loses competitiveness, its ability to convert assets into cash may be discounted, which is commonly known as asset impairment or loss.

With cash as the core, the accounts in the balance sheet are divided into current and non current based on the length of time that assets and liabilities are converted into cash. Assets with strong liquidity and fast liquidity are classified as current assets, while assets that require one year to be realized or consumed are classified as non current assets. Similarly, based on whether the maturity date is within one year, liabilities are also classified as current and non current liabilities to reflect the expected period of cash expenditure for the enterprise. From a time perspective, equity can also be seen as a special long-term liability, whose principal usually needs to be repaid only in the liquidation of the enterprise. At the same time, it does not enjoy fixed interest income, but obtains income through participating in the profit distribution of the enterprise.

After understanding the relationship between the above two elements and the balance sheet, we can talk about how to use them to further interpret the balance sheet.

Firstly, investors can focus on the liquidity of the enterprise.

In a business society where cash is king, corporate liquidity has great reference value for the length of investment cycles. Generally speaking, liquidity can be observed through the following indicators:

oneWorking capital

The more working capital, the stronger the short-term solvency of the enterprise. As an absolute value reference, this indicator can effectively measure the vitality and development potential of enterprises.

two, current ratio and quick ratio

As working capital is greatly affected by changes in the size of enterprises, the current ratio and quick ratio are usually more valuable for reference when analyzing the liquidity of invested enterprises of different sizes.

&Nbsp;&Nbsp;The current ratio is a fundamental indicator that reflects a company's short-term solvency. The higher the ratio, the stronger the short-term solvency. But the higher the current ratio, the better. If the current ratio is too high, it indicates that the enterprise has less financing, low utilization of current assets, and relatively conservative operating methods; Relatively speaking, if the liquidity ratio is too low, it indicates that the enterprise is more aggressive and under high debt repayment pressure. Investors need to further pay attention to whether they have sufficient assets to repay their debts.

The quick ratio is a supplement to the current ratio, which is the current ratio after excluding the impact of inventory. The turnover speed of inventory varies greatly in various industries. For example, in the real estate industry, the turnover days of commercial housing as inventory are much higher than that of fast-moving consumer goods in the retail industry due to the long construction cycle. Therefore, the quick ratio allows investors to compare the solvency of enterprises in different industries from another dimension.

Taking some listed enterprises that have applied for bankruptcy in recent years as an example, although the absolute values of the current ratio and the quick ratio are different due to their different industries, the average current ratio and quick ratio of these enterprises show an obvious downward trend in the three years before the bankruptcy application. Especially from the second year before bankruptcy filing, the average current ratio of these companies will mostly drop tooneBelow is a situation where current assets are less than current liabilities.

&Nbsp& Nbsp& Nbsp& Nbsp; Therefore, as a warning sign, the current ratio and quick ratio can effectively help investors pay attention to the liquidity risk of enterprises in a timely manner.