Here are some questions you may want to ask about balance sheet figures to show you understand the business
- Debtors – If this is a large amount you need to know who owes the money and whether there may be a problem of repayment. It there is a chance the debtor may default then this figure is suspect as an asset. (Look what happened to European countries with having worthless items on their balance sheets.
- Liabilities – this will be divided probably into current (short term) and long term liabilities. Ask questions about how the company is in a position to repay either.
- Fixed Assets – Like equipment and furniture purchase over a given amount which will be on the company books as a cash asset. These goods will be depreciated (knocked down in cost each year) as it is recognised that they lose value. Some companies depreciate computers over 5 years, say, reduce their balance sheet value at 20% per year. (I think this should actually be over 3 years, as this is nearer to wear and tear rates for heavy use computers). This can make a difference to “company value” though this is meaningless as a measure unless the depreciation rate is somewhere near the life of the asset.
- Intangible Assets can also go on the balance sheets such as patents and intellectual property rights – the market for these will go up and down. It is worth asking a question as to how these are valued.
If a company is only showing to be in balance due to its Assets you may want to know what is happening to increase income or reduce expenditure if there is a deficit on trading.