Stocks Investing 101 Part 2: How To Read Seedly Chicken Rice Limited’s Balance Sheet
In the first part of our Stock Investing 101 series, you would have figured out how to analyse a company’s income statement.
Congratulations you have taken your first step towards learning how to analyse a company to decide if its worth investing in.
So… What’s next?
The next step would be to learn how to read a balance sheet: another indispensable skill you will need when analysing a company to decide if its worth investing in.
Disclaimer: we’re not experts but we just want to share the little that we know in hopes that it’ll help you to take the first steps in your investing journey in 2021. Hopefully, this will help you better understand what our savvy community members are saying about investments on Seedly and help you huat in the year ahead!
An Analysis Of Seedly Chicken Rice Limited
For this exercise, I’ll continue using the fictitious chicken rice company, Seedly Chicken Rice Limited to explain the basics of how to evaluate a company in simple, delicious bite-sized terms.
We’ve covered the company’s Income Statement previously.
So now, let’s look at the company’s balance sheet.
Why Look At The Company’s Balance Sheet?
The balance sheet, or the statement of financial position, is a statement showing the assets, liabilities, and equity of the company.
Basically, it tells you what the company owns and owes.
Here’s what Seedly Chicken Rice Limited’s balance sheet looks like:
*Note that these figures are for illustration purposes only.
Let us look at the definitions of some of the line items listed above.
An asset, by definition, is a resource with economic value that will provide a future benefit.
Current And Non-Current Assets
Assets can be classified into current assets and non-current assets.
Current assets are shorter-term assets, while non-current assets are longer-term in nature. A benchmark for short-term will be assets which you hold for up to one year.
Some current assets include:
- Prepaid insurance
Take, for example, Seedly Chicken Rice Limited does catering to companies for their events.
The terms of payment are that these companies (debtors) can pay within 15 days of food delivery. These are called receivables, i.e amounts owed to them that they can expect to receive.
These include the materials, like chicken, rice, eggs, sauces and other cooking stuff that keep in their storeroom, they will constantly be using.
You usually pay insurance upfront and receive the “benefits” later.
Here, Seedly Chicken Rice pays for insurance at the start for the whole year.
Some non-current assets include longer-term assets, like your plant, property equipment (PPE) / fixed assets.
Fixed assets include the kitchen equipment and other fixed assets, like their stoves, cooking equipment and other miscellaneous equipment.
These items are usually carried at net book value on the balance sheet.
Net Book Value = Cost – Accumulated Depreciation
*Do note that accumulated depreciation is the total depreciation amount since the start of acquiring the equipment until balance sheet date.
Seedly Chicken Rice Limited is a famous brand that is known all over Singapore.
The intangible asset or an example of the company’s economic moat here will be its goodwill.
Goodwill is their established reputation of serving delicious chicken rice in hawker centres, this is an ‘asset’ that brings value to Seedly Chicken Rice Limited.
Even though the asset is not tangible (i.e. cannot be touched), goodwill is still very valuable to the company.
A liability is a company’s financial obligation. Like assets, liabilities are categorised into current and non-current as well.
Take note that some current liabilities include payables.
Every two weeks, Seedly Chicken Rice will preorder the materials they need for their cooking in advance. This includes stuff like eggs, rice, sauce, etc… except for the chicken of course – the company pride themselves on the freshness of its chickens.
The payment terms with their suppliers are 15 days after the delivery of the goods. These are called payables, i.e amounts they owe to other parties.
Wages payable refers to the wages that a company’s employees have earned, but have not yet been paid as of the balance sheet’s date.
Here, we take it as they pay the employees at the end of the month. So as of 31 December 2018, they owe their employees one month’s worth of wages.
Do note that non-current liabilities are those with a term of more than a year in nature.
Long Term Borrowings
When Seedly Chicken Rice Limited opened their new stall, they borrowed funds from the bank to do so.
This loan is repayable within 5 years’ time. This loan is categories under the company’s long-term borrowings.
Let’s assume that Seedly Chicken Rice Limited is a very successful company and is publicly traded.
Their shares will form the share capital. Share capital is the financing the company gets by issuing shares.
Share Capital = Share Price x Number of Shares Issued
*Usually a company would not be listed (publicly traded) with such small share capital, Figures are meant for illustration purposes only.
Think of it like the overall balance you have in your bank account. Every month after your income and expenses, whatever is left is your savings.
Similarly, a company’s retained earnings are the accumulated earnings of Seedly Chicken Rice after subtracting dividends that are paid out to investors.
1) Assets = 2) Liabilities + 3) Equity
The reason a balance sheet is named as such is that a company’s assets must balance out its liabilities + equity.
As such, both sides must be balanced in order for the above statement to hold true.
Whenever a company expands its business and opens new stores, you will see that its balance sheet grows.
This is natural because their assets, liabilities and equity will increase when they purchase new equipment, have higher accounts receivables, incur more accounts payables, borrow more and increase their retained earnings.
That being said, whenever a company undergoes expansion and you see that its Balance Sheet grows…
This is generally a good sign because it means that the company is profitable! I mean, no company is going to expand if they can’t even make money right?
This also means that there are good prospects for this company and you can proceed to consider investing in this company.
Now that you have learnt more about balance sheets, the next thing for you to do will be to check out part three of our Stock Investing 101 series: How to Analyse Statment of Cash Flows.
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The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.