How to analyze an earnings report — Part 2: The balance sheet

Published Tue, Oct 4 202210:12 AM EDTUpdated Mon, Oct 10 20221:45 PM EDT

One thing that separates fledgling investors from the pros is reading financial statements. For amateurs, comparing the so-called headline numbers — sales and earnings — to estimates is the full extent of research into a company, whereas in more experienced hands, they are just a starting point. If you want to become a better investor, make like a pro and digest the financials. It's the best way to truly understand a company's performance. In the lead up to the start of earnings season later this month, we've put together a five-part series to help Club members better understand all the tables and charts and how to analyze them. Here's Part 2: the balance sheet. Part 2: Balance sheet If the income statement, which we covered in Part 1 , is akin to a report card, the balance sheet is most like a physical exam: Here we discover just how healthy — or sick — a company is at the end of each quarter. This check-up includes the good (assets and equity) along with potential risk factors (liabilities). It's one of three main sections — the other two are the income sheet and the cash flow statement — included in the earnings reports companies file with the U.S. Securities and Exchange Commission on a quarterly and annual basis. Let's run through what's in most balance sheets and, more importantly, how understanding how to read one can help make you a better investor. First, some basics: All balance sheets are divided into three main parts: assets, liabilities and equity (assets minus liabilities). Additionally, assets and liabilities are segmented into short term (referred to as "current") and long term (referred to as "non-current"): Short term refers to those assets or liabilities intended to be held for a year or less, while long term refers to assets or liabilities with a lifespan greater than a year. As with our discussion on reading an income statement , we'll use Club holding Apple (AAPL) as our example. Here's what we see in Apple's most recent quarterly report. Current assets Cash and cash equivalents : Nothing to unpack here. This first line is cash and other things treated as cash — like short-term Treasurys. Apple puts "highly liquid investments with maturities of three months or less" here, considering bonds of longer maturities as marketable securities. Why you should care : Cash is the ultimate form of liquidity and allows companies to invest in growth and innovation without the need to raise funds by some other means, such as taking on additional debt or issuing additional shares. Marketable securities : These are extremely liquid securities that can quickly be converted to cash if needed. Examples of marketable securities include stocks, longer maturity bonds, derivatives, and other similar investments. But while they may be viewed as similar to cash, they're also more susceptible to market volatility so should be considered a shorter-term investment. Why you should care: Many analysts will include the marketable securities alongside cash and cash equivalents when thinking about how much readily available funds are on the balance sheet. Accounts receivable : This represents sales made on credit. When you buy an iPhone with a credit card, the company doesn't actually receive any cash at the time of purchase. As a result, Apple can't list the proceeds of that sale as cash on the