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 it’s worth investing in.
So… What’s next?
The next step is to learn how to read a balance sheet, another indispensable skill when analysing a company to decide whether it’s 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 take the first steps in your investing journey in 2024. Hopefully, this will help you better understand what our savvy community members are saying about investments on Seedly and help you succeed 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 evaluating 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.
What Is a Balance Sheet?
The balance sheet, or the statement of financial position, shows the company’s assets, liabilities, and equity.
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.
Assets
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 short-term benchmark will be assets you hold for up to one year.
Some current assets include:
- Cash
- Receivables
- Inventory
- Prepaid insurance
Receivables
For example, Seedly Chicken Rice Limited caters to companies for events.
The payment terms 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.
Inventory
These include materials such as chicken, rice, eggs, sauces, and other cooking cutlery that are kept in the storeroom and will be used constantly.
Prepaid Insurance
You usually pay for insurance upfront and receive the “benefits” later. In Seedly Chicken Rice’s case, it pays for insurance at the start of the year.
Non-current assets include longer-term assets such as Plant, Property Equipment (PPE) or fixed assets.
Fixed Assets
Fixed assets include kitchen equipment and other fixed assets, such as 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 from the start of acquiring the equipment until the balance sheet date.
Intangible Assets
Let’s say Seedly Chicken Rice Limited is a famous brand known all over Singapore.
The intangible asset or an example of the company’s economic moat here will be its goodwill.
Their reputation of serving delicious chicken rice in hawker centres is seen as goodwill, an ‘asset’ that brings value to Seedly Chicken Rice Limited.
Even though the asset is intangible (i.e. cannot be touched), goodwill is still very valuable to the company.
Liabilities
A liability is a company’s financial obligation. Like assets, liabilities are categorised into current and non-current.
Take note that some current liabilities include payables.
Accounts Payables
Every two weeks, Seedly Chicken Rice preorders the materials it needs for its cooking in advance. This includes stuff like eggs, rice, sauce, etc.… except for the chicken, of course—the company prides itself 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
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 24 May 2024, they owe their employees one month’s wages.
Do note that non-current liabilities are those with more than a year term.
Long Term Borrowings
When Seedly Chicken Rice Limited opened its new stall, it borrowed funds from the bank.
This loan is repayable within 5 years and is classified under the company’s long-term borrowings.
Equity
Share Capital
Let’s assume that Seedly Chicken Rice Limited is a successful and publicly traded company.
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
*Note: A company with such a small share capital would not usually be listed (publicly traded). Figures are meant for illustration purposes only.
Retained Earnings
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.
Assets = Liabilities + Equity
A balance sheet is named as such because a company’s assets must balance its liabilities and equity.
As such, both sides must be balanced 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 the company is profitable! I mean, no company will expand if they can’t even make money, right?
This also means that this company has good prospects, and you can proceed to consider investing.
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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