Continuing our this financial statements quest, lets learn
more about the Balance sheet(see earlier post here). We should first analyze
what is being reported and measured.
Basically there are four primary parameters which are being measured
- Networth
- Total Assets
- Capital tied up in the business (capital employed)
- Working Capital
The below diagram gives an overview about the balance sheet
Assets
|
Liabilities
|
|
Fixed
Assets(FA)
|
Owners
Funds(OF)
|
|
Long
term Liabilities (LTL)
|
||
Short
Term Assets (STA)
|
||
Short
Term Liabilities(STL)
|
.
Based on the above its now easy to derive the above terms
being used ..
Owners Funds (Networth) is a measure of owners funds in the
business which includes both the initial seed capital and reserves accumulated
as a result of the business output
OF = FA + STA – (LTL +STL)
So basically it’s a difference between the assets and the
liabilities of a business. Its also referred as book value.
Total Assets is a measure of assets which help the business to succeed as a growing concern. It can be
represented either from the asset side or liability side
TA = FA + STA
- Based on asset side
TA = OF+LTL+STL - Based on liabilities
Capital employed is a measure of long term capital in play
in the business. Often the rate of return as a percentage of capital employed
to compare investment candidates.It can be represented as
CE = FA+STA- STL
-Based on asset side
Or
CE = OF + LTL - Based on liabilities
Working Capital is a measure of day to day liquidity
required for business to function. A real estate business may hold lot of
assets however it may not be as liquid as a retail business.
Its represented as
WC = STA – STL
Or
WC = OW+LTL – FA
These 4 values are key parameters which should be understood. We will be using these numbers to make sense of the business also these need to be converted into ratios to improve our analysis.
