In-depth analysis of the accounting balance sheet: a financial analysis tool that should not be overlooked

The Balance Sheet (Assets and Liabilities Statement) is a data layer that management, investors, and business owners need to understand

The balance sheet may seem like a simple office document, but in reality, it serves as a voice indicating the company’s financial health clearly—whether it’s strength, weakness, or even warning signs to watch out for. When I mention “balance sheet,” I refer to the document that shows how much “assets” the company truly has and in what forms those assets are held.

The benefits of the balance sheet are not limited to just viewing numbers. Management can use it to assess the company’s financial strength and compare its financial position with competitors in the same industry effectively. Through in-depth analysis, management can identify the company’s strengths and weaknesses before using that information to develop strategies for growth.

Basic Equation: Assets = Liabilities + Shareholders’ Equity

What is the importance of this formula?

The balance sheet arises from two main parts:

• Assets are resources acquired by the company during operations, used to generate future income.
• Liabilities + Shareholders’ Equity are the total sources of funds used to acquire those resources.

Why is it called a “balance sheet”? Because this equation must always be in balance—both sides must be equal at all times. Currently, we often refer to the balance sheet as the “Statement of Financial Position,” but the fundamental principle remains the same.

The three main components of the balance sheet

1. Assets（资产）：Value-creating resources

Assets are any resources that generate income or are used in operations, divided into two main categories:

Current Assets - Highly liquid assets that can be converted into cash within 1 year, such as:

• Cash and bank deposits
• Trade receivables (when the company sells on credit)
• Inventory
• Prepaid expenses

Non-current Assets - Less liquid assets that cannot be converted into cash within a year, such as:

• Factories, machinery, buildings, and land
• Vehicles and equipment
• Long-term investments
• Patents, copyrights, and franchises

2. Liabilities（负债）：Obligations to be paid

Liabilities are what the company must repay to external parties, arising from past events, payable in the future. Like assets, liabilities are also divided into two types:

Current Liabilities - Payables due within 1 year, such as:

• Trade payables
• Taxes payable
• Portions of long-term loans due within the year

Non-current Liabilities - Payables due beyond 1 year, such as:

• Long-term bank loans
• Long-term bonds

3. Shareholders’ Equity（所有者权益）：Assets belonging to shareholders

Shareholders’ equity is the net assets, calculated as Assets - Liabilities. Simply put, this is the assets truly owned by the owners and shareholders. It consists of two parts:

• Share Capital - Funds raised from shareholders to start and operate the business
• Retained Earnings (or Losses) - Profits accumulated each year after dividends, or losses if any, which also accumulate over time

The importance of the balance sheet for investors and management

The balance sheet (Financial Position Statement) plays a crucial role in financial decision-making:

Liquidity Analysis - From current assets and current liabilities, management can assess whether the company can meet its debt obligations on time.

Profitability Assessment - By comparing with the income statement, investors can see if the company with accumulated losses might have limited profit-making ability.

Debt Repayment Ability - From total assets and total liabilities, it can be measured whether the company can settle its debts in both short and long term.

Formats of preparing the balance sheet: Accounting Balance Sheet vs. Report Balance Sheet

Accounting Balance Sheet（会计式）：The most popular format

The accounting balance sheet displays two sections: assets on the left and liabilities plus shareholders’ equity on the right, resembling a T-shape, making it easy to read and understand.

Steps to prepare an accounting balance sheet:

Step 1: Write the header including three parts:

• Company name
• The word “Balance Sheet”
• Date of preparation

Step 2: List all asset details on the left side, separating current and non-current assets.

Step 3: List all liabilities and shareholders’ equity on the right side, separating current and non-current liabilities.

Step 4: Sum both sides and ensure they balance.

Report Balance Sheet（报告式）：Ordered by classification

This format lists items sequentially according to account categories, divided into 3 sections: Assets, Liabilities, and Shareholders’ Equity. It is suitable for reporting under international standards.

Why change the name from “งบดุล” to “งบแสดงฐานะทางการเงิน”

The old name “งบดุล” only indicates that the two sides are balanced but does not specify the true purpose.

International Financial Reporting Standards (IFRS) changed the name from “Balance Sheet” to “Statement of Financial Position,” which more clearly reflects the actual purpose of this document.

Later, Thailand’s financial reporting standards also adapted accordingly to align with international standards.

How to find and read a company’s balance sheet

Where to find the balance sheet

Investors can view each company’s balance sheet at Datawarehouse.dbd.go.th (Thai Trade Accounting Database).

Steps to access financial statements

1. Visit the website Datawarehouse.dbd.go.th
2. Select the category “Legal Entity Data and Financial Statements”
3. Enter the company name to view its financial statements
4. Choose the tab “Financial Data”
5. You can select the fiscal year, view the income statement, financial ratios, compare year-over-year, and compare across industries.

How to analyze a balance sheet effectively

Step 1: Understand the structure

First, you need to understand that the balance sheet shows the company’s financial position as of a specific date, consisting of three categories: Assets, Liabilities, and Shareholders’ Equity.

Step 2: Analyze from three perspectives

Company liquidity - The ability to pay debts, measured by Current Ratio = Current Assets / Current Liabilities. A ratio of 2 means the company has current assets twice the current liabilities.

Profitability ability - Consider accumulated profits. If high and no losses, you can be confident that the business can generate profits consistently.

Debt-paying ability - Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity. This ratio indicates how much the company relies on debt for financing.

Step 3: Compare trends over time

Don’t analyze just one balance sheet. Compare the company’s balance sheets over multiple years to track financial trends. For example, if assets increase annually, it’s a positive sign; if liabilities grow faster than assets, it could be a warning.

Step 4: Compare with competitors

Review the balance sheets of competitors in the same industry. If your company’s Debt-to-Equity Ratio is lower than competitors, that’s an advantage.

Cautions when reading a balance sheet

Data is historical

The balance sheet shows past financial position, not real-time data. Therefore, if significant events occur after the date of the balance sheet, the information may become outdated.

Data reliability

Some companies may manipulate accounting to make figures look better. Therefore, analyze the balance sheet together with the income statement, cash flow statement, and detailed audit reports.

Impact of economic conditions

Changing economic conditions, such as inflation, interest rate volatility, or currency devaluation, may make comparisons across different periods less accurate. Always consider the economic context during those times.

Summary

The balance sheet is a financial document that displays three key pieces of information: Assets, Liabilities, and Shareholders’ Equity, providing an overview of the company’s financial position at a specific point in time.

The accounting balance sheet is the most widely accepted and used format due to its simplicity and clarity.

The benefits of the balance sheet are not limited to management alone; investors can use it to assess credibility and growth potential, while business owners can evaluate operational performance.

However, reading a balance sheet should be comprehensive, considering other financial data such as the income statement, cash flow statement, and audit reports to draw accurate conclusions and make more effective investment or management decisions.