Assets vs. Liabilities
The balance sheet is a snapshot at a specific date (typically 31 December). Basic equation:
Assets = Equity + Liabilities
The left side shows the use of funds (what the company owns), the right side shows the source of funds (where the money came from). Both sides are by definition equal — the question is how healthy the structure is.
Current Assets
Everything that becomes cash within 12 months: cash & bank balances, trade receivables, inventories, short-term financial investments (money market instruments, listed securities).
Working Capital
Working Capital = Current Assets − Current Liabilities. Measures how much operational liquidity the company has beyond its current obligations. Negative working capital is not automatically bad — Amazon and Walmart have it structurally negative because they collect from customers before paying suppliers.
Non-Current Assets
Long-term assets (> 1 year): property, plant & equipment (buildings, machinery, vehicles), intangible assets (software, patents, licences), goodwill (premium paid over book value in acquisitions), equity investments, financial assets.
Equity
The funds belonging to shareholders: share capital (nominal), capital reserves (premium over nominal), retained earnings, minus treasury stock (shares repurchased in buybacks).
Liabilities
Obligations to third parties. Split into current (< 1 year — trade payables, tax liabilities, short-term loans) and non-current (bonds, long-term bank loans, pension provisions, lease liabilities).
Key Ratios at a Glance
| Ratio | Formula | Healthy benchmark | Warning level |
|---|---|---|---|
| Equity ratio | Equity / Total assets | > 30 % | < 15 % |
| Debt-to-equity | Total debt / Equity | < 2 | > 5 |
| Current Ratio | Current assets / Current liabilities | > 1.5 | < 1.0 |
| Quick Ratio | (Current assets − Inventories) / Current liabilities | > 1.0 | < 0.7 |
| Net Debt / EBITDA | Net debt / EBITDA | < 2–3 | > 5 |
Example: Apple FY2023
Equity ~$62 billion, debt ~$290 billion → equity ratio ~18 %. Weak at first glance. But: Apple simultaneously holds ~$160 billion in cash and short-term securities. Net debt is negative — the company is effectively debt-free; the nominal debt serves only tax optimisation (bonds in the US while cash sits abroad).
Pure equity-ratio thinking falls short for cash-rich companies. Check net debt rather than gross debt.
Pitfalls
- ❌ Goodwill bombs: When 80 % of equity consists of goodwill from an acquisition, a failed impairment test can potentially wipe out 80 % of equity in a single period. Example Bayer/Monsanto: multi-billion goodwill write-downs as litigation risks exploded.
- ❌ Buybacks as equity killers: Companies such as Boeing, McDonald's, and Home Depot have negative equity through decades of buybacks — without any risk of insolvency. The equity ratio is then worthless as a metric; cash flow analysis becomes the only reliable basis.
- ❌ Inventories excluded from the Quick Ratio: Not all inventories are equal. A warehouse full of last-generation iPhones is illiquid. Inventory valuation can contain aggressive assumptions.