Understanding the Statement of Financial Position: A Key Tool for Investors

What Does the Balance Sheet Mean?

Balance Sheet (Balance Sheet) is a primary financial document used to disclose a company’s financial position at a specific point in time, showing what the company owns (assets) and who it owes (liabilities), including the shareholders’ equity invested.

This statement plays a crucial role for management in assessing the company’s liquidity. Additionally, it helps investors compare the company’s financial standing with competitors in the same industry through financial ratio analysis.

The Balance Equation to Remember

Assets = Liabilities + Equity

This equation is the core of the balance sheet. Both sides must always be equal. The name “Balance Sheet” derives from this fundamental principle.

The 3 Main Components of the Balance Sheet

Assets (Assets): Resources that generate income

Assets are what the company owns and can use to generate revenue. They are divided into two categories:

Current Assets - Resources that can be converted into cash within one year, such as cash in bank, accounts receivable (money owed by customers), and inventory.

Non-Current Assets - Long-term resources used in production, such as land, buildings, machinery, and patents.

Liabilities (Liabilities): Obligations to be paid

Liabilities represent the company’s financial obligations to external parties, divided into:

Current Liabilities - Payments due within one year, such as trade payables, accrued expenses.

Non-Current Liabilities - Long-term debts, such as long-term bank loans or bonds issued for fundraising.

Shareholders’ Equity (Equity): Net worth

Shareholders’ equity reflects the “real” ownership value that owners and shareholders are entitled to. Calculated as: Assets minus Liabilities.

This includes:

• Initial capital raised from shareholders
• Retained earnings from various years (after dividends) or accumulated losses

Formats of Preparing the Balance Sheet

T-Account Format (T-Form)

Arranged in a T-shape, this format is popular because it is easy to read. Assets are listed on the left, and liabilities and equity are on the right.

Steps to prepare:

1. Write a three-line header (company name, “Balance Sheet”, date of preparation)
2. List all assets on the left side
3. List all liabilities and equity on the right side
4. Ensure both sides balance

Report Format (Report Form)

This method lists items in a straight line from top to bottom: assets at the top, liabilities and equity below.

Steps to prepare:

1. Write the same header
2. Describe all assets and sum up the total
3. Describe liabilities first, then shareholders’ equity
4. Check that both totals are equal to total assets

Why the Name Changed?

Originally called “Balance Sheet” because it shows that both sides’ numbers balance, but it does not specify the purpose of the statement. The name was changed to “Financial Position Statement” according to international standards. This new name clearly indicates that the statement reflects the company’s financial status.

Importance of the Balance Sheet

For Management

The balance sheet helps management evaluate the company’s financial health, identify strengths for further development, and weaknesses to address. This analysis informs better long-term strategic planning.

For Investors

Investors can use the balance sheet together with the Income Statement to assess the company’s potential by analyzing from three perspectives:

1. Liquidity - Ability to pay short-term debts, assessed by comparing current assets to current liabilities.

2. Profitability - Assessed by the relationship between assets and shareholders’ equity. Excessive accumulated losses indicate poor profit generation.

3. Long-term Debt Paying Ability - Assessed by the debt-to-equity ratio. If debt is too high, the company may face high risk.

How to Access the Balance Sheet

Thai investors can find financial statements of various companies at the website Datawarehouse.dbd.go.th of the Department of Business Development.

Search Steps:

1. Visit Datawarehouse.dbd.go.th
2. Select “Company Data and Financial Statements”
3. Enter the company name to check
4. Open the “Financial Data” tab
5. View from multiple angles, such as fiscal year, income statement, financial ratios, year-over-year comparison, or comparison within the same industry category.

How to Read the Balance Sheet Effectively

Step 1: Understand the Context

Before diving into the numbers, understand that this is a snapshot of the company’s financial position at a specific time, not a constantly changing picture.

Step 2: Categorize Items Wisely

Assets - What the company owns Liabilities - What the company owes Shareholders’ Equity - The net worth belonging to owners

Step 3: Analyze Changes

Compare the current year’s balance sheet with the previous year’s. Have assets increased or decreased? How have liabilities changed? A rise in “accumulated losses” could be a warning sign.

Step 4: Link with the Income Statement

Review the fiscal year’s Income Statement alongside the financial position. If the company is profitable but assets decrease, it may mean profits are used elsewhere.

Cautions When Reading the Balance Sheet

( 1. Outdated Data

The balance sheet shows only the position as of the date prepared, such as year-end. Significant events after that date may not be reflected.

) 2. Reliability

The prepared balance sheet may contain errors or distortions (even if audited), leading to misinterpretation.

3. External Factors

Economic conditions at the time affect comparisons. During high inflation, fluctuating interest rates, or currency devaluation, figures may not be comparable. Investors should consider the economic environment.

Key Takeaways to Understand

The balance sheet is an important report showing how much assets, liabilities, and owners’ equity the company has. The simple but powerful equation ###Assets = Liabilities + Equity( forms the foundation for analyzing the company.

For management, this helps in planning and strategic decision-making. For investors, reading it together with the Income Statement improves investment decisions. However, a comprehensive analysis also considers financial ratios, economic conditions, and post-report events.