Chapter 12. Balance Sheet

The balance sheet is an assessment of the assets and liabilities of a company at the moment the financial year ends.

1. Assets are the things of value that the company owns including cash, property and machinery.

2. Liabilities are what the company owes, such as bills from suppliers and bank loans.

Note that, as elsewhere, assets are shown as positive figures on the balance sheet while liabilities are shown in brackets.

The balance sheet will show the figures for the latest year end in one column and those for the previous year end in a separate column so you can see what changes in assets and liabilities have occurred over the financial year.

As with the profit and loss account, items on the balance sheet can vary from company to company and you do not need to understand every single line comprehensively – but it is useful to get the general picture so that you can assess the overall health of the company and whether it is moving in the right direction.

The annual results and the annual report will usually have notes at the end explaining the various items in the balance sheet.

The annual results to 30 September at Daily Mail and General Trust included an admirably comprehensive table of assets and liabilities. The following table is condensed to show just the main lines.

Table 15: Daily Mail and General Trust balance sheet

Source: Company results

Fixed (or non-current) assets

The first line on the balance sheet will normally be fixed assets. These are items such as machinery that are used by the business. They are fixed in the sense that they do not vary from day to day in the way that cash in hand or debts do. They are calculated on the basis of what they cost in the first place, minus an amount written off the value to cover depreciation – or, in the case of property, they are revalued by an independent surveyor at set periods.

This figure may be subdivided into:

· tangible assets, which are things you can see and touch such as equipment and property

· intangibles such as goodwill, which is a vaguer valuation.

Current assets

Then come current assets. These may be subdivided into cash at the bank and debts that are owed to the company and are due to be paid within 12 months. In other words, these are assets that the company could reasonably hope to lay its hands on fairly quickly.

Current liabilities

After that we have current liabilities, the amounts that the company is due to pay to people such as its suppliers within the next 12 months.

You deduct current liabilities from current assets. If the figure is a positive one, that figure is called net current assets; if you end up with a negative figure, the company has net current liabilities.

The point of this little sum is to see whether the company faces a potential outflow of funds over the next 12 months or whether it has a buffer.

Non-current liabilities

Apart from current liabilities, there may be long-term liabilities – or non-current liabilities – such as a loan that is not due to be repaid within 12 months. As an alternative to issuing shares, companies may raise money through bonds, which are loans raised from investors rather than banks. They are often referred to as loan stock.

Net assets

When you deduct total liabilities from total assets you end up with net assets, which again is usually a positive figure but in the case of a company in financial difficulties could be a negative figure (that is, the liabilities exceed the assets) and this will be shown in brackets.

Earlier it was mentioned that balance sheets can vary according to what line of business the company is in. For example, a bank’s balance sheet is likely to contain several more lines covering items such as customers’ deposits, financial derivatives and the like. The important lines remain, however: total assets, total liabilities and net assets.

Finally, we come to capital and reserves.

Capital reserves

First we have the called-up share capital, which is the number of shares that have been issued multiplied by the nominal value of the shares. So if a company issues 100m shares with a nominal value of 50p each then the called-up share capital will be £50m.

As I will explain in the chapter on rights issues and share placings, shares may be issued for more than their face value. The extra amount goes into what is called the share premium account, which is usually shown on the balance sheet.

The balance sheet will also show reserves. These are profits built up over the years and may include property revaluations. It is from these reserves that dividends are paid.

Where a company has made more losses than profits over the years, there will be a retained loss, which is the accumulated deficit. A company with a retained loss cannot legally pay a dividend until that loss is wiped out. This stops companies from paying dividends with money they do not have.

If you find grappling with the complexities of the balance sheet daunting, don’t worry. You need only grasp the basics. The income statement is far more important in assessing whether to buy shares in a company.