How to Read a Balance Sheet: Debt and Equity
The remainder of the balance sheet is taken up by a hodgepodge of items that are not current, meaning that they are either assets that cannot be easily turned into cash or liabilities that will not come due for more than a year. Specifically, there are five categories:
- Total assets
- Long-term notes payable
- Stockholder's/shareholders' equity
- Capital stock
- Retained earnings
Total assets are assets that are not liquid but are kept on a company's books for accounting purposes. They mainly comprise production plants, property, and equipment, and include land, buildings, vehicles, and equipment that a company has bought for the purpose of operating its business. Total assets are subject to an accounting convention called depreciation for tax purposes, meaning that the stated value of the total assets and the actual value or price paid might be very different.
Long-term notes payable or long-term liabilities are loans that are not due for more than a year. Often loans from banks or other financial institutions, these loans are secured by various assets on the balance sheet, such as inventories. Most companies will tell you in a footnote to this item when the debt will become due and the interest rate the company is paying on it.
The last main component, stockholders' or shareholders' equity, is composed of capital stock and retained earnings. Frankly, this is more than a little bit confusing and does not always add much value to the analysis. Capital stock is the par value of the stock issued that is recorded purely for accounting purposes; it has no real relevance to the actual value of the company's stock. Capital in excess of stock is another weird and difficult accounting convention. Essentially, it is additional cash a company gets from issuing stock in excess of par value under certain financial conditions.
Retained earnings is another accounting convention that, basically, is the money a company has earned minus earnings to be paid to shareholders as dividends and stock buybacks; this amount is recorded in the company's books. Retained earnings simply measures the amount of capital a company has generated. It is most useful for determining what sorts of returns on capital a company has produced.
When you add together capital stock and retained earnings, you get shareholders' equity -- the amount of equity that shareholders currently have in the company.
For more lessons on reading a balance sheet, follow the links at the bottom of our introductory article.