Chapter 13 · Financial Statements: the Balance Sheet
What a balance sheet balances
Everything a company owns was paid for by lenders or by shareholders. That is the whole statement.
A balance sheet is a photograph taken at one instant — usually the last day of a quarter or year. It says: here is everything we own, and here is who paid for it.
What a balance sheet balances
The identity that gives it its name:
| Formula | |
|---|---|
| The balance sheet identity | Assets = Liabilities + Equity |
| Rearranged | Equity = Assets − Liabilities |
| Per share | Book value per share = Equity ÷ Shares outstanding |
Worked example
A company reports total assets of Rs 8,40,00,000 and total liabilities of Rs 5,60,00,000, with 2,00,000 shares outstanding.
- Equity = 8,40,00,000 − 5,60,00,000 = Rs 2,80,00,000
- Book value per share = 2,80,00,000 ÷ 2,00,000 = Rs 140
- If the share trades at Rs 210, price to book = 210 ÷ 140 = 1.5
You are paying one and a half times the stated net assets. Whether that is expensive depends entirely on how well the company earns from those assets — which is the next statement's job to tell you.
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