The Balance Sheet Explained: Assets, Liabilities and Equity

Balance Sheet

The balance sheet shows what a company owns, owes and the equity left for shareholders. Learn the main items, key ratios and red flags traders look for.

Intermediate3 min readUpdated 3 Oct 2026

Lesson 3 of 45

The balance sheet is a snapshot of a company's financial position at a single point in time, usually the end of a quarter or year. It lists what the company owns (assets), what it owes (liabilities) and the difference, which belongs to shareholders (equity). While the income statement shows performance over a period, the balance sheet shows financial strength: how much debt a company carries, how much cash it has and whether it can survive a downturn.

The basic equation#

assets = liabilities + shareholders' equity

The two sides always balance, hence the name.

The main items#

Section	Items	Notes
Current assets	Cash, short term investments, accounts receivable, inventory	Expected to turn into cash within a year
Non current assets	Property, plant and equipment; intangible assets; goodwill; long term investments	Used over many years
Current liabilities	Accounts payable, short term debt, accrued expenses, deferred revenue	Due within a year
Non current liabilities	Long term debt, lease liabilities, pensions, deferred taxes	Due later
Shareholders' equity	Common stock, retained earnings, treasury stock	What is left for owners. See Debt, Cash and Shareholders' Equity

A worked example#

Reading a simple balance sheet

Assets	$ millions	Liabilities and equity	$ millions
Cash	200	Accounts payable	150
Receivables	180	Short term debt	100
Inventory	220	Long term debt	500
Property and equipment	700	Other liabilities	150
Goodwill and intangibles	300	Shareholders' equity	700
Total	1,600	Total	1,600

Current ratio: (200 + 180 + 220) / (150 + 100) = 2.4. Net debt: 600 minus 200 = $400 million. Debt to equity: 600 / 700 ≈ 0.86.

Key ratios#

Ratio	Formula	What it shows
Current ratio	Current assets / current liabilities	Short term liquidity
Quick ratio	(Cash + receivables) / current liabilities	Liquidity excluding inventory
Debt to equity	Total debt / equity	Financial leverage
Net debt	Total debt minus cash	Debt burden after cash
Net debt to EBITDA	Net debt / EBITDA	Years of earnings needed to repay debt. See Operating Income, EBIT and EBITDA
Book value per share	Equity / shares outstanding	Accounting value per share. See Price to Sales and Price to Book

What traders look for#

Liquidity: enough cash and short term assets to cover obligations. See Working Capital.
Leverage: high debt magnifies risk, especially when rates rise. See Operating and Financial Leverage.
Debt maturities: large debt coming due soon can force refinancing at higher rates.
Asset quality: large goodwill can be written down after poor acquisitions. See Goodwill and Intangible Assets.
Inventory and receivables trends: rising faster than sales can signal weak demand or collection problems.
Off balance sheet items: commitments disclosed only in the notes.

Red flags#

Signal	Possible problem
Receivables growing much faster than revenue	Aggressive revenue recognition or customers not paying
Inventory piling up	Weak demand, future write downs
Rising short term debt and falling cash	Liquidity stress
Negative equity	Accumulated losses or heavy buybacks funded by debt
Large goodwill relative to equity	Risk of impairments

Limits of the balance sheet#

Historical cost: many assets are recorded at purchase price, not current value.
Missing assets: brands, software and employee know how built internally often do not appear.
Snapshot timing: companies can dress up the balance sheet at period end.

Frequently asked questions#

What is a balance sheet?#

A financial statement showing a company's assets, liabilities and shareholders' equity at a specific point in time.

Why must the balance sheet balance?#

Because everything a company owns is financed either by borrowing (liabilities) or by owners (equity), so assets always equal liabilities plus equity.

What is a good current ratio?#

It depends on the industry, but a ratio above about 1.0 to 1.5 is often seen as comfortable; very high ratios can mean idle cash.

Next, follow the money in the Cash Flow Statement.

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Next lessonCash Flow StatementThe cash flow statement shows where a company's cash came from and where it went. Learn the three sections, how to read them and why cash flow can reveal problems.