How to Read a Balance Sheet

Book value. It is how much a business is worth: the combined total of all its assets and liabilities.

It is normal for a company or organization to calculate its own book value every month or quarter. Doing so provides key information to the company’s investors. It is also essential to the company’s management, who must keep close track of their decisions’ financial impact.

In a sense, book value is a company’s score card. When compared to previous figures, it shows whether the company has lost or gained value

How Is Book Value Calculated?

The tool used to calculate book value is called a balance sheet. It reveals the company’s financial position at the time of its creation (i.e. reporting date) by showing its available assets (e.g. cash, real estate and inventory) and existing liabilities (i.e. debts, wages payable and unearned revenue).

In addition to book value, a balance sheet provides the figures needed to calculate profitability, liquidity, and debt-to-equity ratio. Balance sheets are also commonly used by management for securing financing, and by external analysts for compliance purposes.

How Is a Balance Sheet Created?

A balance sheet shows a company’s equity by subtracting its liabilities from its assets: assets – liabilities = equity. In other words, a balance sheet is the sum total of everything that makes a business valuable, minus everything that decreases its value.

It is called a “balance” sheet because equity necessarily equals assets minus liabilities. If a balance sheet reveals anything else (i.e. it is imbalanced), then it was necessarily prepared incorrectly.

A balance sheet is a relatively straightforward accounting instrument. All of its data are stored in one column (or more, if it includes data from multiple reporting dates). Let’s use a real world example of a balance sheet to show you how simple it is. The following data were taken directly from The Coca-Cola Company (all figures are USD, in millions):

	Dec 31, 2023	Mar 29, 2024
Current Assets
Cash and cash equivalents	9,366	10,443
Short-term investments	2,997	4,760
Total Cash, Cash Equivalents and Short-Term Investments	12,363	15,203
Marketable securities	1,300	1,716
Trade accounts receivable, less allowances of $504 and $502, respectively	3,410	4,244
Inventories	4,424	4,961
Prepaid expenses and other current assets	5,235	3,338
Total Current Assets	26,732	29,462
Equity method investments	19,671	19,495
Other investments	118	147
Other noncurrent assets	7,162	7,291
Deferred income tax assets	1,561	1,457
Property, plant and equipment, less accumulated depreciation of $9,359 and $9,233, respectively	9,236	9,306
Trademarks with indefinite lives	14,349	13,532
Goodwill	18,358	18,210
Other intangible assets	516	492
Total Assets	97,703	99,392
Current Liabilities
Accounts payable and accrued expenses	15,485	19,425
Loans and notes payable	4,557	6,054
Current maturities of long-term debt	1,960	1,392
Accrued income taxes	1,569	1,485
Total Current Liabilities	23,571	28,356
Long-term debt	35,547	35,104
Other noncurrent liabilities	8,466	5,465
Deferred income tax liabilities	2,639	2,521
Shareholders’ Equity
Common stock, $0.25 par value; authorized — 11,200 shares; issued — 7,040 shares	1,760	1,760
Capital surplus	19,209	19,321
Reinvested earnings	73,782	74,868
Accumulated other comprehensive income (loss)	14,275	14,504
Treasury stock, at cost — 2,732 and 2,732 shares, respectively	54,535	55,016
Equity Attributable to Shareowners of The Coca-Cola Company	25,941	26,429
Equity attributable to noncontrolling interests	1,539	1,517
Total Equity	27,480	27,946
Total Liabilities and Equity	$97,703	$99,392

As you can see, all of Coca-Cola’s assets are neatly lined at the top of the balance sheet. On reporting date March 29th, 2024, the company’s cash, short-term investments, inventory, market securities, and other assets totaled $99.392 million. On the same reporting date, the company’s accounts payable, loans, debt, and other liabilities totaled $71.446 million. When you subtract liabilities from assets, you get $27.946 million: Coca-Cola’s total equity at that point in time.

This balance sheet shows that Coca-Cola increased in value four months after the close of Q4 2023. Its equity increased by $466 million over that timespan: not certain indication that the company will continue increasing in value, but potentially a sign of greater things to come all the same.

Your own company probably isn’t as large as Coca-Cola. Even so, regularly creating a balance sheet is the best way of assessing whether your business’s book value is increasing or decreasing. If it is increasing, good! A sign of success. But if it is decreasing, then you have the information you need to devise methods for shrinking your liabilities, growing your assets, or ideally both. You may also choose to increase your liabilities by taking out the financing you need to invest in growth. Although it entails taking on more risk, that strategy already has helped countless companies change direction before.

Are you looking for business financing in Minnesota? Then Sherburne State Bank is here to help you grow your company. We welcome you to contact us today, or visit one of our locations in Becker, Monticello or Princeton, MN to speak with one of our lending agents in person!

How to Read a Balance Sheet

How Is Book Value Calculated?

How Is a Balance Sheet Created?