Brian Feroldi Profile picture
Sep 30, 2021 20 tweets 5 min read Read on X
Accounting is the language of business.

If you buy stocks, you MUST learn how to read a balance sheet.

Here’s everything you need to know:
The balance sheet is one of the 3 major financial statements.

It shows company’s:

▪️Assets: What it owns
▪️Liabilities: What it owes
▪️Shareholders Equity: It's net worth attributable to its owners

At a fixed point in time
That “at a point in time” part is key!

A balance sheet is a SNAPSHOT of a company’s net worth.

It is usually measured at the end of a quarter/year.

That’s different from an income statement or cash flow statement, both of which are measured over periods of time
All balance sheets follow the same formula:

Assets = Liabilities + Shareholders Equity

This formula must be in balance at all times

(Hence the term “balance sheet”) Image
Side Note:

This formula can be easily re-arranged into the “net worth” formula that you are already familiar with

Assets - Liabilities = Shareholders Equity (Net worth) Image
Companies get soe leeway in how they categorize each item on their balance sheet

This graphic shows some of the most commonly used categories & terms Image
Let’s start with assets, which is what a company OWNS

Assets are listed in order of liquidity

(Liquidity means how quickly a security can be turned into cash)

The most liquid assets are at the top, the least liquid on the bottom Image
There are two categories of assets:

Current assets:
▪️Assets that are expected to be used in <1 year

Long-term assets:
▪️Assets that a company will benefit from for >1 year Image
Common current assets:
▪️Cash: Checking account, t-bills, CDs w/ <3 maturity
▪️Marketable Securities: Stocks, bonds...etc that can easily become cash
▪️Accounts Receivable: Money it is owed by its customers
▪️Inventory: Unsold goods
▪️Prepaid expenses: Insurance, rent, etc…
Long-term assets come in 2 forms:

1: Tangible Assets
▪️Buildings
▪️Equipment
▪️Property
▪️Stores

2: Intangible Assets
▪️Trademarks
▪️Goodwill (premiums paid to make an acquisition)
▪️Patents
▪️Stocks/Bonds held >1 Year
Now for Liabilities, which are what a company OWES

There are 2 categories of liabilities:

1: Current liabilities:
▪️Bills that will be paid in <1 year

2: Long-term liabilities:
▪️Bills that are due in >1 year Image
Common current liabilities (due <1 year):
▪️Short-term debt
▪️Accounts payable (money owed to suppliers)
▪️Interest
▪️Unpaid Wages
▪️Dividends
▪️Taxes

Common long-term liabilities (due >1 year):
▪️Long-term debt (also called "Notes")
▪️Customer pre-payment
▪️Taxes
▪️Pension
Finally, is shareholders equity

This is money attributable to the business owners (shareholders) Image
Common categories:

▪️Retained Earnings: Net profits a company reinvests in the business
▪️Treasury Stock: Money used to buy back stock
▪️Additional Paid-In Capital: Amount shareholders have invested beyond common/preferred stock
This thread is just a broad overview of the balance sheet

Want specifics & and a helpful example?

We did a deep dive into the balance sheet on my YouTube channel using $AAPL's recent numbers as an example

Enjoy this thread?

Follow me @BrianFeroldi

I tweet about money, personal finance, & investing
Want to learn more about the income statement?

I have a thread on that too:

Want to learn more about financial statements?

These three books are excellent resources: Image
These threads take time to put together

so I super appreciate DMs like this! Image

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More from @BrianFeroldi

Aug 29
Capitalism is brutal.

If you invest, you MUST know how to identify a moat.

Here are 9 financial “rules of thumb” that Warren Buffett uses to tell if a company has one: Image
1: Gross Margin

Found: Income Statement

Formula: Gross Profit / Revenue

Moat: Consistently above 40%

No Moat: Under 40% & volatile Image
Buffett’s logic:

A consistently high gross margin signals that the company isn’t competing exclusively on price.

A high gross margin also provides ample gross profit to pay expenses and leaves money for shareholders.
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Aug 27
How to analyze an income statement in less than 2 minutes: Image
The income sheet is one of the three major financial statements.

It shows a company’s:
▪️Revenue (Sales)
▪️Expenditures (Costs / Expenses)
▪️Net Income (Earnings, Profits)

Over a period of time. Image
Management teams have leeway in categorizing their income statement.

This means that not all income statements look the same.

Here is a typical layout and the meaning of the most commonly used terms: Image
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Aug 26
Financial Statements For Beginners

Want to learn accounting?

Study these 9 simple infographics (a visual thread) ↓ Image
Image
Financial Statements DO NOT have a universal layout

Here are some other balance sheet terms you might see: Image
Read 9 tweets
Aug 25
How to analyze a cash flow statement in less than 2 minutes: Image
The Cash Flow Statement shows how cash moves in and out of a company over a period of time.

Its purpose is to track cash movement through a business. Image
The Cash Flow Statement uses CASH accounting.

This method only records transactions when money goes in or out of an account.

This differs from ACCRUAL accounting, which is the accounting method used on the Income Statement and Balance Sheet. Image
Read 9 tweets
Aug 17
"Margin of Safety" by Seth Klarman is an incredible investing book.

But a used copy costs $1,200!

Here are 26 short investing lessons from this classic book (for free): Margin of Safety
1: Markets are volatile. Never invest unless you are sure a "margin of safety" exists.

2: Focus on the intrinsic value of an investment. Only act when there's a meaningful difference between value and price. Image
3: Focus on the downside first. Avoid taking big losses.

4: Disciplined analysis, thorough research, and a patient, long-term perspective lead to superior returns.

5: Value investing isn't easy. Expect long periods of underperformance.
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Aug 16
The P/E ratio SUCKS.

It’s a flawed metric that deceives investors.

Here's exactly why the P/E ratio can be INCREDIBLY misleading (and what to use instead): Image
The P/E ratio's flaw is that the "earnings” can be misleading.

If “earnings” aren’t sustainable, or are artificially inflated/depressed, the P/E ratio will be wrong.

Here's all the reasons why that can happen...
1: Accrual Accounting

The GAAP income statement uses accrual accounting.

Accrual accounting is useful, but it’s basically an accountant’s opinion.

Here are some of the expenses that can cause “earnings” to be higher or lower than the actual cash flow of a business Image
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