How to read company balance sheet is very important. Why? This is the health status of the company.
In layman term:
Shareholder equity / fund and loan / borrowings = where is the money come from?
Equity = optional to give dividend (if make profit), sometimes determine by dividend policy.
Loan = borrowing from financial institutions e.g. bank. Need to pay interest.
Assets = where is the money go? Equity money or borrowing money use to set up business, build plant, buy machine, buy stock etc.
Therefore, a quality company or value stock mean manage the money (from equity or / loan) effectively. For instance:
-money use to buy machine able to increase output and improve product quality. Increased sales and profit margin.
-money use to take over profitable company. Diversification or synergy.
-money use to build a strong management team
-money use to buy quality raw material
-money use to buy latest machine to avoid obsolescence.
-money use in research and development to avoid technology obsolescence
-money use as dividend to reward shareholders and stimulate share price.
If you see a company keep loosing money, high debt, prolong negative cash flow money . So, if you buy the stock, you will likely have a sleepless night.
You don't need go so detail, don't need go any expensive seminar, you just need to understand few keys data, you will able know where is your risk of investment.
Next will write up why Profit and Loss account is important.
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