How does information from the balance sheet help users of financial information?

Well, here are the basics (there are actually three sheets of financial data). One thing is that instead of the minus sign, negative numbers are shown with parentheses.





Look at Google's Balance Sheet: http://finance.yahoo.com/q/bs?s=GOOG%26amp;ann鈥?/a>





- Total Assets (what Google owns) is growing much faster than Total Liabilities (what Google owes).





- Long Term Debt: $0 -%26gt; Google didn't take out any big loans, so credit crunches don't affect them directly.








Look at the Income Statement:


http://finance.yahoo.com/q/is?s=GOOG%26amp;ann鈥?/a>





- Revenue (how much Google earns) is rapidly increasing, as is Gross Profit (Revenue - Cost of Revenue)





- Operating Income (Gross Profit - Expenses) is also increasing





- Net Income is increasing. This is the most important one, but their are tricks companies can do to inflate this number which is why everything has to be looked at. Have you heard of P/E ratio? Price to Earnings. (Net Income/Number of Shares) is the Earnings portion of this calculation.








Look at the Cash Flow (how much they spent):


http://finance.yahoo.com/q/cf?s=GOOG%26amp;ann鈥?/a>





- Total Cash Flow From Operating Activities: for most companies, this is the cash created from their business (selling ads), and is the most important one generally





- Total Cash Flows From Investing Activities: just as it sounds (Capital Expenditures generally means expensive physical things: buildings, computers, manufacturing equipment, etc.) This is usually negative for most companies sicne they have to buy a lot of equipment, although positive is better. Financial companies should generally have positive numbers here, since Investment in securities (stock, bonds, etc.) show up here.





- Total Cash Flows From Financing Activities


Sale Purchase of Stock: positive means they are raising money by selling more stock shares (which means that the current shares are smaller pieces of the same pie so are less valuable). Negative generally means they think their shares are undervalued so they are buying them back.


Net Borrowings - loans (positive: new loans; negative: paying off old loans)





- Change In Cash and Cash Equivalents: postive numbers mean that they are earning more than they are spending. This is a sum of the three Cash Flows.








Think of companies like people you would give a loan to. Look for ones that spend less than they earn and don't have a lot of debt. The missing ingredient is that when investing, you must also estimate how the number will chane in the future.





PS I know its long, but no one said investing was simple!|||It can tell people how the company is doing by showing assets and liability. For example if the company makes a large sale, but they do not have enough money to buy at the best wholesale price, then it would tell how much it may cost them to fill the order, which could explain a high loan that will cost a high interest rate. That type of information is less exposed to the public. They also may be in deep debt and be sued soon or what ever you make of it.|||With information from the balance sheet you can calculate different ratios to determine the liquidity of the company, the ability to pay debts in the short and longterm, and how leveraged the company is, the degree to which the company is relying on debt for financing.