Be a Great Investor by Reading the Balance Sheet Like a Boss.

The Finance Topic of the Week: How to Read a Balance Sheet

Last week, we learned how to read an income statement and practiced with Nvidia P&L.

This week, let's focus on the balance sheet.

It is frequently overlooked and appears to be too complicated to examine. If you invest and pick stocks, this is a mistake. You must be familiar with balance sheets.

My goal is to make it as simple as possible so that you can begin looking at different balance sheets of companies in which you want to invest.

Let's review the fundamentals

What is a Balance Sheet?

The balance sheet is a snapshot of the company’s financial health at a given point in time.

The key formula to remember is:

Here is the overview of a company's balance sheet:

Assets: what a company owns

The most important thing to remember is that you have two types of assets: current and long-term. The difference is that the former is more liquid, implying that they will be used in less than a year.

Current Assets:

• Cash & Equivalents: checking account, t-bills...

• Marketable Securities: stocks, bonds

• Accounts Receivables: Money customers owe to the company

• Inventory: Unsold goods

• Prepaid Expenses: Insurance, rent, etc..

Long-Term Assets:

Tangible Assets (can be physically touched)

• Buildings

• Equipment

• Property

• Stores

Intangible Assets

• Trademarks

• Goodwill

• Patents

• Stocks/Bonds held > 1 year

Liabilities: what a company owes

Similar to the Assets section, you have 2 types of liabilities: current and long-term.

Current Liabilities (due in less than a year):

• Short-term debt

• Accounts Payables (money owed to suppliers)

• Unpaid wages

• Interests

• Taxes

• Dividends

Long-Term Liabilities (due in more than a year):

• Long-term debt

• Customer pre-payment

• Taxes

• Pension

Shareholder Equity

This is the money that belongs to the shareholders.

• Preferred stock: stock offering fixed-income payment

• Common stock: money invested in the company

• Additional Paid-in capital: money shareholders have invested beyond common/preferred stocks

• Retained earnings: net profits a company reinvests in the business

• Treasury stock: amount of money used to buy back stocks

Balance Sheet Analysis

If the Income Statement shows how much a company *earns,* the Balance Sheet shows how much *capital* was required to make those earnings possible.

The balance sheet can help answer questions like whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether it is heavily indebted in comparison to its peers.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

An example: Apple Balance Sheet

You can download Apple Balance sheet here.

We will find the formula :

Assets = Liabilities + Shareholders Equity

Assets

Liabilities:

Shareholder Equity:

The Mindful Data of the Week

I saw this great chart from www.ourworldindata.org and wanted to share it in this newsletter issue.

Countries that achieved economic growth while also reducing CO2 emissions between 2005 and 2019 are listed below. It is feasible!

Max Roser wrote an interesting blog post advocating for a carbon price.

Without a monetary carbon price, those with the lowest emissions bear the brunt of the costs of climate change. A carbon price, on the other hand, implies that those who cause the emissions must also pay for them.

Pricing carbon emissions, whether through a carbon tax or a 'cap and trade' system, is effective, according to empirical research and theory. It shifts production and consumption away from carbon-intensive goods and services and toward low-carbon alternatives, resulting in lower emissions.

You can read Max Roser's full blog post here.

The Data Science Topic of the Week:

The Dataset

I picke the Top Ramen Ratings 2022 from Kaggle.

You can download it with the link below:

Exercise

1. Load the Dataset

2. Show the counts of all unique values in the brand column

1. Load the dataset

2. Show the count of all unique values in the brand column

We will use the very useful value_counts method in Pandas

We can also show the percentage by value by adding the argument normalize=True

It is interesting to note that the values are sorted in descending order by default. We can choose the sort order we want with the argument ascending.

value_counts is one of the functions I use the most when performing exploratory data analysis. It is very useful to inspect the values of a dataset.

Reference:

pandas.Series.value_counts — pandas 1.4.4 documentation (pydata.org)

That's a wrap for today. Stay curious, practice your Python and see you next week!

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