How to read a balance sheet of a company listed on stock market?

In investing in stock market people expect fast, better returns than from other avenues. This expectations is strong in new investors as they are all bombarded with news and promotive materials about 'successful' investors earning huge amounts in short period.

Though speculations and manipulations are there in every field it is much more happening in the field of stock markets. When we deposit money in a bank, the money is used by the bank for its business operations. But after the initial public issue (or any similar later issues) the money invested by a buyer of shares from stock market is not going to the company directly for use.
Then why should a stock market investor bother about the company?

Except for a less quantum of day traders and speculative business men, most small investors make investments and wit for some period to get returns. The returns can be by way of regular dividends, bonus shares, and share value appreciation to gain by selling at a higher price.

For this to happen, the company should continue its operations, grow, expand and gain good profits. This is mainly bas on the financial health of the company.

As outsiders ordinary investors know about these matters from the periodical financial and managerial disclosures by the company and the Annual reports and Balance sheet published by the company.
A balance sheet will give us the financial figures as at the end of a financial year and may have some comparisons with previous similar periods. From c
these data and their inter relationships we can get an idea of whether the company has adequate capital for its present and future needs of growth and satisfying liabilities:
whether it is making sufficient profit to pay returns(dividends) to its promoters and shareholders:
whether it is keeping sufficient provisions for contingencies and expansion:
whether the company can sustain competition and overcome obsolesce and expand market ; etc.

The inter relationships are called ratio analysis.
Some of the figures which are of interest to a stock investor of a company are: Capital; and reserves; Gross profit, Net Profit, Profit after Tax; Dividend and dividend history; Return on equity; Book value, EPs r Earnings Pe Share etc.
Some of these can be obtained direct from balance she and some others by doing calculation from taking various figures from balance sheet.
There are many books, articles and materials giving all needed details which are easily available online and offline.

Along with balance sheets an investor should also read the annual report and also analysis and opinion from market experts.

Balance sheet of a company is the depiction of the performance of a company in a nut shell in a tabular form. It shows the expenses made by the company as well as sales made by it. The balance sheet also shows the liability held by it which it has to mitigate in due course of time.
Generally companies take loans for their operations and loan repayment is also done regularly by them so that also is shown in the balance sheet.
By going through the balance sheet we can also find the tax provisions and profit after payment of taxes. This item 'Profit after the tax' is an important entity as a part of this only goes to the share holders in the form of dividends and remaining part goes to the company reserves which company can use for its business enhancement.
So by seeing the balance sheet of the company we can find a lot of information about its performance and accordingly take decisions of investing in its shares in the market.
There are some terms which can be seen in a balance sheet or can be derived from it and which we can check for knowing about the company in greater details. One such term is EPS which is earning per share. If it is more then it is clear that company is earning good amount. Another is P/E ratio. This is the ratio between share price and earnings per share. If it is less then we can assume that there is potential in the share price for an increase. If it is high then we can infer that the share price is already quite high in the market and we should avoid buying it.
There are other considerations like debt to be serviced by the company. A very high debt is not a healthy sign.
So balance sheet is a source of valuable information for an investor for taking a decision to invest or not to invest in the shares of that company.

Fundamental analysis is required to discover the exact value of the shares you are going to invest in. It involves the study of various data of the company. An investor invests for a profit, so invest in a company that is financially strong and gives him a fair return. First of all, you need to have some knowledge about the balance sheets. This balance sheet contains the statement of assets of the company with value on one side and the statement of liability with value on the other side. From that, you have to find out the various ratios and compare them with the standard value or with the industry average to understand whether the condition of the company is sound or bad.
The following ratios are specifically judged for this:
1. Price-Earnings Ratio
To calculate the P / E ratio, you have to divide a company's current share price by its earnings per share.
A higher P / E may indicate that a stock is expensive, but it may be because the company is doing well and may continue to do so.
You can compare the P / E of one or more stocks with the industry average.
2. The PEG ratio
It is used to determine the relationship between a stock's price, earnings per share (EPS), and the company's growth.
3. Price-to-book value (P / BV) ratio
Used to compare the market value of a company with the value of its books. The book value of the share, in simple terms, is the amount that will remain if the company relinquishes its assets and pays all its liabilities.
4. Earnings per share (EPS) Earnings per share (EPS) is a measure of a company's profit. Investors use it to understand the value of the company and simply can understand how many alternative returns are available in the market compared with the return from share investment.
5. Product dividend ratio
This is the dividend per share divided by the share price. A high statistic indicates that the company is doing well. Similarly, a low dividend yield does not always mean a bad investment because companies may choose to reinvest all their earnings so that shareholders achieve a good return in the long run.
6. Debt to equity ratio
It shows how much a company has leveraged, that is, how much debt is involved in the business with the promoters' capital (equity).
High debt is not recommended.
Besides the above, many financial ratios are also suitable for selecting a particular stock for investment. You are investing so all risks are yours. So be careful before making any investment decision.

Balance Sheet reflects the financial statement of a company helping us to analyse its financial position at a given period of time. This might be assumed to be the report card of the performance of the company.
With the help of Balance Sheet, we can access income and cash flow of the company with the observation of Income Statement records reflecting both income and expenses. The second part of this sheet is the Retained Earnings which would result in no distribution dividends to shareholders and the lastly the third parameter of this sheet is the Cash Equivalent.
In nut shell, the Balance Sheet of a company would signify the following vital points-
1) Assets- It would consist of both current and long term assets.
2) Liabilities- This would include both current and long term liabilities.
3) Equities - This would comprise both common stock and retained earnings.
Mathematically, Balance Sheet is the summation of both liabilities and equities of share holders.
While going through the Balance Sheet, there are two steps of considerations to show the financial statements such as
1) Vertical Analysis- In this type of Vertical Analysis, we would take all the terms indicated in the Balance Sheet in terms of their percentage of the different components such as current assets, cash and cash equivalents, property, plants equipments etc.
2) Horizontal Analysis- Here all the components are treated as absolute terms indicating the trend for sometime and hence the same is also known as the trend analysis.

In a company's balance sheet you will find the following items and you can see them to know the strength of the company.

A) Book value per share: High book value per share indicates that they made good profits and there is an accumulated profit over the years. This indicates that the company a strong company.
B) Inventory turnover ratio: It indicates the ratio of invetroy and sales. This gives an idea about the efficiency of the unit in controlling their inventory. This figure should be comoared with the companies that are doing very well in the same field and it should be almost same.
C) Return on net worth (RoNW): This value indicateswill the net profit generated using shareholders' funds. High value indicates that their capital base is low.
D) Cash holding per share: This value will give us an idea about the strength of company; A high amount of cash per share will indicate a strong company.
E) Quick ratio : The ratio is known as acid test ratio.A low quick ratio is never advisable as the company may go into liquidate problem.

In addition to the above in a balance sheet you can look for current ratio, net worth, free casn flow,debt-equity ratio, return on capital used, debt to equity ratio, net worth and return on total assests. All these items will be mentioned in the balance sheet with figures and facts. If you go through the balance sheet of a company all these items will be found.