The income statement shows how a company performed over a period. The balance sheet shows where it stands on a single day — what it owns, what it owes, and what's left for the owners.
The one equation
Everything on a balance sheet obeys a single rule:
Assets = Liabilities + Shareholders' equity
- Assets — what the company owns: cash, inventory, buildings, equipment, and money owed to it.
- Liabilities — what it owes: loans, bonds, and unpaid bills.
- Equity — the leftover that belongs to shareholders (also called book value).
Example: a company with $3bn of assets and $2bn of liabilities has $1bn of shareholders' equity. If it sold everything and paid every debt, $1bn would remain for owners.
Short-term health: working capital
Working capital is short-term assets minus short-term bills. The current ratio (current assets ÷ current liabilities) turns this into a quick gauge: around 1.5–3 is usually comfortable, while below 1 can signal the company may struggle to pay what's due within a year.
Long-term health: how much debt?
| Check | What it asks | Rough comfort zone* |
|---|---|---|
| Debt-to-equity | How reliant on borrowing is it? | Lower is safer; varies by sector |
| Net debt / EBITDA | How many years of earnings to repay debt? | Below ~2× comfortable, above ~4× risky |
| Interest coverage | Can profits cover the interest bill? | Higher is safer (e.g. >3×) |
*Rules of thumb only — banks, utilities and other capital-heavy sectors safely carry far more debt than asset-light software firms.
The big picture: a sturdy balance sheet lets a company survive a bad year and pounce on opportunities. A fragile one forces it to raise money or cut back at exactly the worst time.
