- author: The Finance Storyteller
How to Read and Analyze a Balance Sheet?
A balance sheet is a financial statement that provides an overview of what a company owns and what a company owes at a specific point in time. In this article, we will be discussing how to read and analyze a balance sheet, using the 2017 balance sheet of Alphabet Inc. (parent company of Google) as a case study. This tutorial is a companion to "How to Read an Annual Report," "How to Read an Income Statement," and "How to Read a Cash Flow Statement."
Key Terminology & Points to Check
Learning to read a balance sheet takes practice and some understanding of the key terminology. Here are some key points to check:
- The balance sheet total, which should be the same left and right (what a company owns equals what a company owes)
- The current ratio, a good indicator of a company's liquidity
- Equity as a percentage of the balance sheet total, which gives an indication of how the company is financed and what its level of robustness is.
Downloading the Annual Report
To analyze a balance sheet, you need to download the annual report. For Alphabet Inc., you can go to abc.xyz/investor and download the 10-K PDF version. Scroll down the table of contents of the 10-K annual report, up to item 8: financial statements and supplementary data. Click on the link. You now arrive at the index to the financial statements and the related notes. Click on "consolidated balance sheets."
Analyzing the Assets Side
On the assets side, more than half of the total assets sit in cash, cash equivalents, and marketable securities, which are worth taking a closer look at. Property and equipment and goodwill are other key items on the assets side that we will be analyzing.
- Cash, cash equivalents, and marketable securities: $101.9 billion in total. Note 3 to the Alphabet Inc. financial statements provides details of where that balance is invested: $36.9 billion in U.S. government notes, $24.2 billion in corporate debt securities, and $11 billion in mortgage-backed securities. The cash, cash equivalents, and marketable securities portfolio generated an interest income of $1.3 billion in 2017, recorded in other income in the income statement.
- Property and equipment: The balance of property and equipment was $42.4 billion at the end of 2017, up $8.1 billion versus the previous year. The major balance sheet components in the property and equipment balance at the end of 2017 were land and buildings at $23.2 billion, information technology assets at $21.4 billion, and construction in progress at $10.5 billion.
- Goodwill: The goodwill balance at the end of 2017 is $16.7 billion, which is up only slightly compared to the previous year.
Analyzing the Liabilities and Equity Side
On the liabilities and equity side, we will be reviewing income taxes payable and accrued expenses and other liabilities.
- Income taxes payable: The details on this balance sheet liability account are not directly given to us in the Alphabet Inc. annual report, but there are other ways to get an idea of what is going on. The provision for income taxes in the income statement was $14.5 billion in total in 2017, much higher than in previous years. The vast majority of the amount, and the majority of the increase, is from federal and state taxes.
- Accrued expenses and other liabilities: This item is larger than $10 billion at the end of 2017, and the balance has gone up significantly year-over-year.
Remember, some items to review on the balance sheet depend on the contextof the company.
As always on the Finance Storyteller channel, this article/tutorial is for educational purposes only. None of the comments in this video should be interpreted as investment advice. Please do try this at home and comment on your findings below!
Analyzing Alphabet Inc's Balance Sheet
Alphabet Inc's financial statement for the year 2017 was impacted by federal and state taxes, as well as the US Tax Act of December 2017. The main item affecting the company was the one-time transition tax, which was recorded as a debit in the income tax expense in the income statement. Although it was not yet paid in cash, the credit was recorded under the liability account called income taxes payable on the balance sheet. The company's accrued expenses and other liabilities for December 31st, 2016 and December 31st, 2017 are listed in the financial statement.
Interestingly, Alphabet Inc was alsofined $2.9 billion by the European Commission, which is currently being appealed and has not yet been paid. The fine was recorded as an expense in the income statement, whereas the offset credit went to accrued expenses and other liabilities. In other words, while the expense was recorded, payment or settlement has not yet occurred.
Checking the Balance Sheet Analysis
After reviewing the selected assets and liabilities in detail, and examining balance sheet total and equity percentage, it is time to connect both sides of the balance sheet to obtain a larger picture. One way to accomplish that is through the current ratio. The current ratio shows the company's current assets versus its current liabilities. Current assets are items that are already or will likely become cash within 12 months, while current liabilities need to be paid in cash within 12 months.
The current ratio of Alphabet Inc is very high at 514% ($124.3 billion in current assets over $24.2 billion in current liabilities), meaning the company has high liquidity. For every $1 in current liabilities, Alphabet Inc has $5.14 in current assets. This indicates that if the company owe any money, there is a high likelyhood they can pay it.
In summary, we have performed a high-level analysis of Alphabet Inc's balance sheet by looking at balance sheet totals, current ratio, equity as percentage of the total, and selected asset and liability items. It is essential to consider factors such as taxes, fines, and other liabilities to obtain a complete understanding of a company's financial statement. A better understanding of the balance sheet is a crucial step in assessing an organization's financial health.
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