2 Excel Templates

1) Building Cash Flow Statement by Indirect Method​​

This is a template of the balance sheet and income statement, based on which the cash flow has been calculated using the indirect method.​​

​Click here to get your Excel template​

2) Segmented P&L​​​​​​​​

Not all products, services, or business units contribute equally to the bottom line.

Segmenting the P&L allows you to:

  • Identify which segments are the most profitable and which are underperforming.
  • Allocate resources more effectively to high-performing areas.
  • Discontinue or restructure unprofitable segments to improve overall profitability.

For example, a company might discover that one product line generates 80% of its profits, while another is a consistent money-loser. This insight can drive strategic decisions about where to focus efforts.​​​​

​Click here to get your Excel template​

Here are 2 Infographics for Today:

1) Financial Models

​Get this infographic on a high-resolution PDF​​​​​​​​​​​​​​​​​​​

2) How to Select Valuation Method

​Get this infographic on a high-resolution PDF​

Here’s today’s “How to” guide:

How to Analyse Balance Sheet for (Stock) Investment.

When it comes to making informed investment or lending decisions, the balance sheet is one of the most critical financial statements to analyze.

For investors and lenders, understanding how to dissect a balance sheet can mean the difference between a sound investment and a costly mistake.

Here’s a step-by-step guide to analyzing a balance sheet for stock investment or lending decisions:

1. Understand the Structure of a Balance Sheet

A balance sheet is divided into three main components:

  • Assets: What the company owns (e.g., cash, inventory, property, equipment).
  • Liabilities: What the company owes (e.g., loans, accounts payable, deferred revenue).
  • Shareholders’ Equity: The residual interest in the company after deducting liabilities from assets (e.g., retained earnings, common stock).

The fundamental equation is: Assets = Liabilities + Shareholders’ Equity

2. Assess Liquidity: Can the Company Meet Short-Term Obligations?

Liquidity measures a company’s ability to cover its short-term liabilities with its short-term assets. Key metrics to evaluate include:

  • Current Ratio = Current Assets / Current Liabilities [A ratio above 1 indicates the company can cover its short-term obligations]
  • Quick Ratio = (Current Assets – Inventory) / Current Liabilities [A more stringent measure that excludes inventory, which may not be easily liquidated]

For lenders, strong liquidity is crucial to ensure the company can repay its debts. For investors, it signals financial stability and operational efficiency.

3. Evaluate Solvency: Is the Company Financially Stable in the Long Term?

Solvency assesses a company’s ability to meet its long-term obligations. Key metrics include:

  • Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity [A lower ratio suggests less reliance on debt and a stronger equity base]
  • Interest Coverage Ratio = EBIT / Interest Expense [Measures how easily the company can pay interest on its debt. A higher ratio is better]

High levels of debt can be risky, especially in volatile markets or industries. Investors and lenders should look for a balanced capital structure.

4. Analyze Asset Quality: Are Assets Productive and Efficient?

Not all assets are created equal. Evaluate the quality and efficiency of a company’s assets by examining:

  • Return on Assets (ROA) = Net Income / Total Assets [Indicates how effectively the company uses its assets to generate profits]
  • Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory [Shows how quickly inventory is sold and replaced. A higher ratio suggests efficient inventory management]

For lenders, productive assets mean better collateral value. For investors, efficient asset utilization often translates to higher profitability.

5. Examine Shareholders’ Equity: Is the Company Creating Value?

Shareholders’ equity reflects the company’s net worth.

Key considerations include:

  • Retained Earnings: A growing retained earnings balance indicates the company is reinvesting profits for future growth.
  • Book Value per Share = Shareholders’ Equity / Number of Outstanding Shares
    • Compare this to the stock’s market price to assess whether the stock is undervalued or overvalued.

For investors, a strong equity base signals long-term value creation. For lenders, it provides a cushion against potential losses.

6. Look for Red Flags

While analyzing a balance sheet, watch out for warning signs such as:

  • Rising Debt Levels: Increasing liabilities without corresponding growth in assets.
  • Declining Cash Reserves: A shrinking cash balance may indicate liquidity issues.
  • High Accounts Receivable: If receivables are growing faster than revenue, it could signal collection problems.

7. Compare with Industry Peers

A balance sheet doesn’t exist in isolation.

Compare the company’s metrics with industry averages to gauge its relative performance.

For example, a debt-to-equity ratio that’s high for a tech company might be normal for a capital-intensive industry like utilities.

8. Consider the Big Picture

While the balance sheet is a powerful tool, it’s only one piece of the puzzle. Combine your analysis with insights from the income statement and cash flow statement to get a holistic view of the company’s financial health.

Remember, the balance sheet is a reflection of the past, but it also holds clues to the future. Use it wisely to unlock opportunities and safeguard your investments.