Key Elements of the Balance Statement for Investment Bankers
Investment bankers with a practiced eye and attention to detail can take a quick glance at a balance sheet and identify a company's financial strengths and weaknesses. The balance sheet gives investment bankers a look at the resources and liabilities a company has at its disposal, critical information when it comes to pitching financial products to the company.
Know the assets
Investment bankers might crack open the balance sheet by first examining what the company has. All the companies’ possessions are listed as assets and placed into understandable groups:
Cash and cash equivalents: Cold, hard cash — or, as controversial football star Randy Moss put it, Straight cash, homey. There's nothing like it, whether inside your wallet or on the balance sheet of a company. Investment bankers pay particular attention to cash because it's critical in many corporate maneuvers. Cash equivalents are extremely short-term investments that can be quickly and easily turned into cash.
Accounts receivable: When companies sell goods and services, they usually don't get paid right away. Instead, the selling company takes an IOU from the customer for a short time. These IOUs are called accounts receivable on the balance sheet.
Inventory: Companies that make products can't manufacture them out of thin air. Companies must buy raw material and other ingredients, which is included in inventory. But the inventory line item also counts the value of products waiting to be sold or in various stages of manufacturing.
Property, plant, and equipment: Companies often make massive investments in equipment and other facilities to bring their products and services to market. Here investors can find out how much those investments cost the company, minus depreciation (see the next bullet point).
Accumulated depreciation: When companies buy an asset, whether a machine or building, the passage of time takes a toll on that asset and typically reduces its value. Accountants require the companies to estimate how much value has likely evaporated due to the passage of time, and this is known as depreciation.
Depreciation may be a cost, but it doesn't cost the company any of its cash. This characteristic is important to remember.
Long-term investments: Assets that companies plan to keep for a while, typically more than a year, are included here. Generally, these investments are stocks, bonds, and real estate.
Goodwill:Goodwill is one of those assets that investment bankers know have value but have trouble describing. Goodwill is a catchall term to describe assets that have value, but generally aren't tangible. Goodwill is often associated with copyrights, trademarks, and brand names, for instance.
One of the most common ways for companies to accumulate goodwill is when they buy another company for more than the book value of the company on the balance sheet. The difference is goodwill.
Total assets: Investment bankers tally up the value of all the assets the company controls, and that is the total assets.
How to find out about the liabilities
You have to spend money to make money. That's just the reality of business. And the bills companies face, or the things they owe, show up in the liabilities section of the balance sheet, which includes the following:
Accounts payable: Just because a company buys something from another firm doesn't mean it actually has to pay for it right away. The accounts payable line item measures the sum the company owes.
Short-term borrowings: Companies can borrow in many different ways. Here, accountants require companies to break out what portion of the debt the company owes is due in less than a year.
Long-term debt: When companies borrow money that's not due for more than a year, the total must be tallied up in the long-term debt line item.
Current portion of long-term debt: A company may have a long-term loan, but part of that loan is to be repaid in less than a year. That portion of the loan due in the short-term must be disclosed here.
Capital leases: Being a renter can be convenient, even for companies. But some leases come with many strings attached, which put the company on the hook for the obligations of the leased property. Those cases must be documented on the balance sheet.
Pension and other post-retirement benefits: If you're like most working Americans, you probably don't get a pension and have to settle for a 401(k) match. But some older companies still owe retirees pension benefits. And oftentimes, these are especially large obligations.
Equity is one of those words in finance that can have many different meanings. In investment banking, the term equity is often used synonymously with stock, for instance. But when talking about the balance sheet, the term equity usually refers to the value of the shareholders’ ownership of the company. Another good way to think of equity in terms of the balance sheet is the different between assets and liabilities.