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How to interpret Balance Sheet – Part 2

Please click on the above image to have a clear view.

In our previous article, we discussed how to interpret the balance sheet. We had a look at the asset part of the balance sheet. The article can be accessed HERE. Today let’s check out the other two parts – Liabilities and Equity. We will use the same balance sheet of Pantaloon Retail today as well.

Current Liabilities - Current liabilities are the ones that directly oppose the Current Assets. The ones that are of utmost importance here are the Accounts Payable and the Short Term Debt.

Accounts Payable - These are the bills that the company owes to other entities usually its suppliers. These bills are to be paid in one business cycle or a year. There are two ways to read this number. One, if the company has too much of accounts payable and if its sales numbers are bad as well, the company is not in good health.

The other way is that large companies usually have the buying power with their suppliers and will be able to delay the payments or get a longer payment cycle. You should remember that each and every rupee that is being delayed to the suppliers will go into the business. The strong companies having buying power will have higher Accounts Payable and make money out of other’s money(Accounts Payable).

Short Term Debt - This is usually the money that the company has borrowed to meet its short term needs. Usually the money should be repaid in a year’s time. However, this could even be a long term debt that is getting due with in a year’s time. Usually this is a parameter to be seen for companies that are in financial distress or for a high growth company. High growth companies tend to pile up Short term debts with a view that their growth will be tremendous which will repay the money. But, often they get caught in some kind of financial problems.

The Short term debt is usually compared with the total assets or the current assets to see how serious the number is. For Ex – Koutons and Trent does not have any short term debt as on FY 08 end and Pantaloon had a short term debt of 246 crore. However this number is much smaller when compared to the total current assets of 3833 crore or the total assets of 6686 crore.

Non Current Liabilities - This is what the company needs to pay back after a year’s time. This usually contains the money that the company borrowed by issuing bonds or loans from banks.
The most important item here would be the Long term debt.

Shareholder’s Equity - This is essentially the difference between the Total Assets and the Total Liabilities and this is exactly what the shares holders own. I am mostly confused with the details that are provided in this section and the only thing that i usually look for would be the retained earnings or the accumulated deficits. Retained earnings is what the company has accumulated over the years from its net profits after paying whatever it wants to its shareholders. If the company is already making negative profits, you would find the numbers in the Accumulated Deficits section.

As i said before, one should necessarily spend time on Balance Sheet, Income Statement, Cash flow statement and the Annual reports. These are the ones which contain loads of information regarding the company. There can be so many people giving you good picks but if you know how to interpret the financial statements, you will be able to act independently. I hope the article on How to read balance sheets would help you going forward and take a rational decision.

To contact the equity analyst on this story: Arun Gopalan in Chennai at Arun@hbjcapital.com

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