What’s My Company Worth?

In my previous post, I introduced the idea that a company has a report card called the financial statements.  There are three main financial statements – the balance sheet, income statement and cash flow statement.  In this post, I’ll explain what the balance sheet is.  The balance sheet gives us information about a company for a point in time.  This means that the balance sheet is only valid for the day that is on the balance sheet.  Here is an example of a balance sheet.  Balance Sheet

The balance sheet is divided into two sections:

• Assets
• Liabilities and Equity

In order for the balance sheet to be correct it must balance.  this means that the Assets section must equal the Liabilities and Equity Section.  In our example, Total Assets = $26,000.  Total Liabilities and Equity = $26,000.  Total Assets = Total Liabilities and Equity.  The balance sheet balances.

In the Assets section there are two – three sections.

• Current Assets
• Fixed Assets
• Other Assets

The current assets are assets that can be easily turned into cash within the next twelve months.  Fixed assets are assets that have a will last more than twelve months.  A car for instance should last at least five years.  The other assets is for items that are neither current assets nor fixed assets.  this section could contain items like security deposits and intangible assets such as goodwill.

The Liabilities and Equity section has two sections

• Liabilities
• Equity

Liabilities are divided into two categories based on when the payment of those liabilities are due.  If the liability is due in the next twelve months, than the liability is classified as a current liability.  If the due date is more than twelve months away than the liability is a long term liability.

The final section of the balance sheet is the Equity section.  This is the section that tells me what a company is worth.  A company’s worth or equity is the difference between the assets and the liabilities.  Another way to look at this is A company’s net worth is equal to what it owns minus what it owes.  In our example, the Dunder Mifflin Company has total equity of $6,000.