Reading a company's balance sheet
A balance sheet is a photograph of a business on one day. This lesson shows how it is organised into five blocks, lets you build one, and reads the real balance sheets of two companies that could hardly be more different.
- Level
- Beginner
- Reading time
- About 22 minutes
- Know this first
- The income statement
By the end you will be able to:
- place any item in the right block of a classified balance sheet
- work out a current ratio and a borrowings-to-equity figure
- describe what a company's biggest assets say about its business
- explain a large balance sheet change by looking at the other statements
How a balance sheet is laid out
You already know the contents: assets on one side, liabilities and equity on the other, and the two sides equal. What a real balance sheet adds is order. Each side is split into non-current items, which last or fall due beyond a year, and current items, which turn into cash or must be paid within a year or within the normal operating cycle. Within each group, the lines run roughly from the least liquid to the most.
| Block | What goes in it | Typical lines |
|---|---|---|
| Non-current assets | Things the business keeps and uses for longer than a year | Property, plant and equipment, intangibles, long-term investments |
| Current assets | Things that will turn into cash soon | Inventories, trade receivables, cash, short-term investments |
| Equity | The owners' stake | Share capital, reserves and retained profit |
| Non-current liabilities | Debts due after more than a year | Long-term borrowings, long-term lease liabilities, deferred tax |
| Current liabilities | Debts due within a year | Trade payables, short-term borrowings, wages and taxes due |
This is the classification used in the format Indian companies follow. In the previous lessons you sorted items into assets, liabilities and equity. This lesson takes the next step, deciding which block of the balance sheet each item belongs in.
Build one
Meena's shop has traded for a year. Below are eleven items from its books, with their amounts. Put each one in the right block, then watch the totals. When every item is in the right place, the two sides each add up to ₹7,00,000. If an asset ends up among the liabilities, or the reverse, the sides stop matching and the difference tells you how far off you are.
- Shelves and counter, after allowing for wear₹80,000
Non-current asset. It is owned and will be used for years.
- Delivery van₹2,50,000
Non-current asset. A van lasts several years.
- Cash and bank balance₹1,20,000
Current asset. It is already cash.
- Stock waiting to be sold₹1,80,000
Current asset. It will be sold, and so turned into cash, within the year.
- Owed to the shop by schools for goods delivered₹70,000
Current asset, called trade receivables. The schools are expected to pay soon.
- Meena's own money put into the shop₹3,00,000
Equity. It is owner's capital.
- Profit earned in earlier months and kept in the business₹1,40,000
Equity. Profit that is kept belongs to the owner.
- Bank loan, repayable over the next three years₹1,00,000
Non-current liability. It does not fall due within the year. In practice, the instalments due in the next twelve months would be shown separately as current.
- Owed to the paper supplier for goods received₹90,000
Current liability, called trade payables.
- Salaries earned in March, to be paid in April₹30,000
Current liability. The work is done and the payment is due within a month.
- Money received from a school for supplies not yet delivered₹40,000
Current liability, called deferred revenue. Meena owes goods until she delivers them.
0 of 11 items placed.
The deferred revenue item is the one people most often place wrongly. It looks like money, so it feels like an asset. But the cash is already counted in the cash balance. What the ₹40,000 describes is an obligation, the goods still owed, which is why it sits among the liabilities. The lesson on accrual vs cash accounting explains how it arises.
Four questions to ask any balance sheet
A balance sheet has dozens of lines, but a few questions usually reveal what matters. Each has a simple measure.
- Can it pay its bills in the next year? Compare current assets with current liabilities. Current assets divided by current liabilities is the current ratio. Above 1 means current assets cover current liabilities.
- How much has it borrowed? Compare borrowings with equity. A higher figure means more of the business is financed by lenders.
- What is the money tied up in? Look at the biggest asset line. Is it stock, equipment or investments?
- Who funds the assets? Divide equity by total assets. The rest, whatever the owners did not fund, is funded by creditors of one kind or another.
A real company: Titan
Titan's balance sheet appears line by line in the lesson on assets, liabilities and equity. Here are its answers to the questions above, side by side with Info Edge, a company with a very different balance sheet. All figures are standalone, as at 31 March 2024, with the previous year's Titan figure beside each.
| Question | Titan, 2024 (2023) | Info Edge, 2024 |
|---|---|---|
| Current assets ÷ current liabilities | 1.70 (1.80) | 2.73 |
| Borrowings ÷ equity (borrowings as printed, leaving out lease liabilities and Titan's gold on loan) | 0.40 (0.10) | under 0.01 |
| Biggest asset line, as a share of total assets | Inventories, 51% (60%) | Non-current investments, 84% |
| Equity ÷ total assets | 44% (48%) | 86% |
Titan's balance sheet is a business of stock. Inventories of ₹16,874 crore are 51% of its assets, which is natural for a retailer and manufacturer of jewellery. It is financed partly by equity (44% of assets) and partly by borrowing. Its borrowings rose from ₹1,190 crore to ₹5,809 crore during the year, and its current ratio slipped from 1.80 to 1.70. It still has more current assets than current liabilities, but the margin is slimmer. The balance sheet shows a business that grew its stock and investments, and borrowed to do it.
Info Edge's is a business of investments. 84% of its total assets are non-current investments, mostly holdings in other companies. It has almost no borrowing, and 86% of its assets are funded by equity. Its current ratio is 2.73. These are two healthy-looking balance sheets that could hardly be more different, and it would be a mistake to rank them against each other. They describe different businesses.
Reading a large change
Info Edge's total assets more than doubled in a year, from ₹129,141.90 million to ₹295,348.18 million. Here is its balance sheet in summary, with the biggest lines shown and the others combined. Every combined line is a sum of printed lines.
| ₹ million, as at 31 March | 2024 | 2023 |
|---|---|---|
| Non-current investments | 248,916.66 | 91,260.21 |
| All other non-current assets | 7,494.22 | 6,594.58 |
| Total non-current assets | 256,410.88 | 97,854.79 |
| Current investments | 7,267.40 | 7,546.78 |
| Cash and cash equivalents | 1,450.42 | 1,126.09 |
| All other current assets | 30,219.48 | 22,614.24 |
| Total current assets | 38,937.30 | 31,287.11 |
| Total assets | 295,348.18 | 129,141.90 |
| Equity and liabilities | ||
| Total equity | 254,763.15 | 109,264.82 |
| Deferred tax liabilities (net) | 24,319.72 | 6,394.37 |
| All other non-current liabilities | 2,014.80 | 692.02 |
| Total current liabilities | 14,250.51 | 12,790.69 |
| Total equity and liabilities | 295,348.18 | 129,141.90 |
Non-current investments rose by ₹157,656.45 million. A deferred tax liability, a tax that will become payable when the gain is realised, rose by ₹17,925.35 million. The income statement shows an other-comprehensive-income gain of ₹157,101.44 million on investments and a tax charge on it of ₹17,924.02 million. The balance sheet moves by almost exactly those amounts. A gain recorded in equity has to appear somewhere on the balance sheet, and here it appears as a higher investment value and a higher deferred tax liability. The cash balance did not take part. It rose by only ₹324.33 million.
This is the practical value of knowing the equation. When a balance sheet changes by a very large amount, the cause is somewhere in the other statements, and the answer has to be consistent with both sides of the sheet.
What a balance sheet is made of
Two companies with the same total assets can own completely different things. The table splits the assets of Apple, Microsoft and Toyota into four groups and shows each as a share of total assets. The first group, cash and investments, includes the short-term and long-term marketable securities for Apple, and cash and short-term investments for Microsoft; for Toyota only cash and cash equivalents are counted.
| Latest balance sheet, share of total assets | Cash and investments | Receivables | Inventory | Property, plant and equipment |
|---|---|---|---|---|
| Apple | 36.9% | 11.1% | 1.6% | 13.9% |
| Microsoft | 15.3% | 11.3% | 0.2% | 33.1% |
| Toyota | 9.6% | 3.9% | 4.9% | 16.4% |
Apple holds $132,420 million in cash and securities, 36.9% of everything it owns. Only $5,718 million is tied up in inventory. Toyota is the opposite: ¥4,598,232 million of inventory (4.9% of assets) and ¥15,333,693 million of property, plant and equipment (16.4%), reflecting factories, machinery and vehicles. What a company owns tells you how it makes money, and the next section shows a case where the change in that mix over one year was large.
A large change: Microsoft's property and equipment
In one year, Microsoft's property and equipment, which includes the buildings and equipment behind its cloud services, grew from $135,591 million to $204,966 million, an increase of $69,375 million or 51.2%. Total assets grew 20.9%, so the property share of assets moved from 26.5% to 33.1%. Where did the increase come from? The cash flow statement shows $64,551 million spent on additions to property and equipment in the year, and the balance sheet increase is larger than that. The difference is explained in the notes: assets can also be added without cash being paid in the year, such as when a company takes equipment on a finance lease, and depreciation takes the other way.
This is the habit the lesson is trying to teach: when one line on the balance sheet moves a lot, find the cash flow line that explains part of it and the note that explains the rest. A balance sheet by itself shows where a company is, and the other two statements show how it got there.
Layouts differ, the buckets do not
US companies such as Apple and Microsoft list assets starting with the most liquid, cash first, then receivables, then inventory, then long-term assets. IFRS does not prescribe one layout. Some IFRS companies, for example in Europe, list non-current assets first. Toyota presents current assets first and follows the order familiar to US readers. If you are reading a balance sheet from a different country, begin by finding the totals for current assets, non-current assets, current liabilities, non-current liabilities and equity, and the rest follows.
The dividing line between current and non-current is one year, or the company's operating cycle if that is longer. For a business like Toyota's financial services arm, whose receivables run for years, the split matters: of the ¥33,625,035 million of financial services receivables, 65.9% falls due after one year and appears in non-current assets.
Common mistakes
Taking asset values as market values
Most assets are recorded at what they cost less wear, not what they would fetch today. A building bought decades ago may be worth far more than its balance sheet figure.
Looking for the things that are missing
A brand built inside the company, a skilled workforce and a loyal customer base are not generally recognised as assets. Titan's brand is not on its balance sheet at its worth to the business. The balance sheet records what the accounting rules allow.
Comparing balance sheets across industries
A retailer carries stock, a software company carries people and cash, a bank carries loans. A ratio that is healthy for one can be a warning for another.
Reading a single ratio as a verdict
A current ratio below 1 can mean trouble, or it can describe a business that collects cash before it pays suppliers. Look at the lines that make up the ratio.
Forgetting that the sheet is one date
A balance sheet is a photograph. A company can look different a day before or after the year end, so compare it with the previous year's balance sheet.
Try it yourself
1. A company has current assets of ₹18 crore and current liabilities of ₹12 crore. What is its current ratio, and what does it mean?
Show the working
18 ÷ 12 = 1.5. The company has ₹1.50 of current assets for every ₹1 it owes within the year.
2. A company has total assets of ₹40 crore, equity of ₹10 crore and non-current liabilities of ₹15 crore. What are its current liabilities?
Show the working
Total equity and liabilities must be ₹40 crore. ₹40 crore − ₹10 crore − ₹15 crore = ₹15 crore of current liabilities.
3. Where would each of these go: (a) a five-year loan from a bank, (b) a customer's advance for goods to be delivered next month, (c) shares held as a long-term investment?
Show the answers
(a) Non-current liabilities, with the part due in the next twelve months shown as current. (b) Current liabilities, as deferred revenue. (c) Non-current assets, because it is held for the long term.
4. Using the table above: Titan's equity was ₹14,457 crore against total assets of ₹32,862 crore. What share of its assets were funded by someone other than the owners?
Show the working
Equity funds 44% of the assets, so 56% is funded by creditors and other liabilities.
Where this is used
- A bank reads the balance sheet to see how much a borrower already owes and what could be pledged as security.
- A supplier looks at the current ratio and payables before agreeing to give credit.
- An analyst computes return on equity and debt measures from it, in later lessons on ratios.
- An owner uses it to check that growth is not being paid for with short-term debt that falls due too soon.
Key terms
- Current
- Turning into cash, or falling due, within twelve months or the normal operating cycle.
- Non-current
- Lasting or falling due beyond that.
- Trade receivables
- Money customers owe for goods or services already delivered.
- Trade payables
- Money owed to suppliers for goods or services already received.
- Current ratio
- Current assets divided by current liabilities.
- Deferred tax liability
- Tax that will become payable later because of a gain or timing difference recorded now.
- Fair value
- The price an asset would fetch in an orderly sale today.
- Liquidity
- How quickly something can be turned into cash without losing value.
Questions people ask
Why does the balance sheet list assets in that order?
Indian companies follow a prescribed format with non-current items first, then current. Some countries list current assets first. The order changes, but the contents do not.
Is a high current ratio always good?
Not necessarily. A very high ratio can mean cash sitting idle or too much unsold stock. A healthy level depends on the business.
Why is equity not split into current and non-current?
Because equity has no due date. The company does not have to repay it by a certain day.
Does a strong balance sheet mean a good investment?
No. A balance sheet describes financial position at one date. It does not tell you the price you would pay, the prospects for the business, or what the shares are worth. This site does not give investment advice.
Sources and review
- Titan Company Limited, audited standalone and consolidated financial results for the year ended 31 March 2024, filed with BSE. Source of the Titan balance sheet.
- Info Edge (India) Limited, audited standalone financial statements, Q4 FY24. Source of the Info Edge balance sheet and profit and loss account.
- Institute of Chartered Accountants of India, Ind AS 1, Presentation of Financial Statements (lecture slides), for the split into current and non-current.
- IFRS Foundation, Conceptual Framework for Financial Reporting, for the definitions of an asset, a liability and equity.
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
- Toyota Motor Corporation, FY2025 Financial Summary (IFRS, unaudited, in millions of yen), furnished to the US Securities and Exchange Commission on Form 6-K. Source of Toyota's statements.
How the numbers were checked: both balance sheets were rebuilt from printed lines, and in each year and for each company assets equal equity plus liabilities. Ratios were calculated from those lines, and the builder's totals were tested with every item in the right and in wrong blocks.