Why do investors need to read the balance sheet? Learn the truth about a company's assets and liabilities.

The major problem for many investors is not knowing how to start assessing a company’s financial health. Most often, they only look at the stock price, missing the opportunity to find companies with strong fundamentals. The Balance Sheet is a crucial document that reveals the true financial condition of a company through its assets, liabilities, and shareholders’ equity.

Financial Engineering: The Equation All Companies Must Balance

The basic formula to remember:

Assets = Liabilities + Shareholders’ Equity

This equation appears simple but carries deep meaning. When a company raises funds to operate, it must come from two sources of capital: debt (money to be repaid) and equity (money that does not need to be repaid). Both must always equal what the company has purchased (assets). This is why it’s called the “balance sheet” — both sides must be balanced.

The 3 Main Components of the Balance Sheet

Assets: The properties of the company

Current Assets are highly liquid assets that can be converted into cash within 1 year, such as:

• Cash and bank deposits
• Trade receivables (money owed by customers)
• Inventory
• Prepaid expenses

Non-current Assets are assets that take longer to convert into cash, such as:

• Land, buildings, and machinery
• Long-term investments
• Patents and copyrights
• Vehicles and equipment

Liabilities: Obligations to be paid

Current Liabilities must be paid within 1 year:

• Trade payables
• Tax liabilities
• Short-term loans due within the year

Non-current Liabilities are long-term obligations:

• Long-term bank loans
• Bonds payable
• Other debts not yet due

Shareholders’ Equity: The company’s net worth

This is what remains after subtracting liabilities from assets:

• Share Capital — funds invested by shareholders
• Retained Earnings — accumulated profits over multiple years (after dividends are paid)

If the company incurs a loss, this section will show “Accumulated Loss.”

Key Expense Components Investors Need to Understand: What is SG&A?

While studying the balance sheet, investors should also review the income statement. SG&A is an abbreviation for Selling, General, and Administrative Expenses, which are costs related to selling, managing, and general operations. These expenses are not directly related to production but are necessary for running the business, such as advertising costs, management salaries, and office rent.

How to analyze SG&A: Look at the ratio of SG&A to revenue. The lower, the better — indicating more efficient expense management. Companies with excessively high SG&A may have cost management issues or unnecessary expenses.

How to Use the Balance Sheet: From Theory to Practice

Step 1: Assess the “relative importance” of each category

Check which type of assets dominates. Manufacturing companies tend to have higher non-current assets (factories, machinery), while service companies may have higher current assets.

Step 2: Analyze liquidity

Divide current assets by current liabilities to get the “liquidity ratio.” A ratio greater than 1 indicates the company can meet short-term obligations.

Example: Current assets of 100 million THB ÷ current liabilities of 50 million THB = 2.0

A result of 2.0 means the company has cash and assets convertible to cash twice the amount of liabilities due this year.

Step 3: Examine the trend of shareholders’ equity

Compare shareholders’ equity over multiple years. If it increases steadily, it indicates profitability and value accumulation. A decline may be a warning sign.

Step 4: Compare with competitors

Review the balance sheets of companies within the same industry. A company with similar assets but lower liabilities demonstrates better financial management.

Where to Access Financial Statements

For investors in Thailand, financial data can be viewed at:

Website: Datawarehouse.dbd.go.th

Steps to search:

1. Visit Datawarehouse.dbd.go.th
2. Click on “Corporate Data and Financial Statements”
3. Enter the company name you want to check
4. Select the “Financial Data” tab
5. You can choose the fiscal year, view income statements, financial ratios, and compare data across years or business types

Things to Watch Out for When Reading the Balance Sheet

1. Data is only historical

The balance sheet is prepared for a specific period and is not real-time data. If significant events occur after the statement date, the information may be incomplete.

2. Confidence is limited

The balance sheet may be audited (by an auditor) or not. Some companies may adjust figures to present a better picture. Always check whether the report has been audited by an independent auditor.

3. Economic conditions matter

Inflation, interest rates, and currency values can affect comparisons across years. Consider the economic context during those periods.

4. Must be analyzed alongside other financial statements

The balance sheet alone is insufficient. It should be studied together with:

• Income statement (to see where profits come from)
• Cash flow statement (to verify actual cash position)
• Notes to financial statements (to understand market details)

Summary: Why is the balance sheet important for investors?

The balance sheet is not just a boring document for accountants. It’s a map that shows what the company owns, what it owes, and its net worth. Investors who diligently study this document will have diverse information, enabling better investment decisions.

Understanding SG&A is also crucial, as it helps evaluate the company’s expense management efficiency.

Smart investing relies on accurate and complete information. The balance sheet is a good starting point, but deeper analysis is necessary.