The balance sheet is an important part of the financial statements, which reflects the financial position of a business over a certain period of time. Through the balance sheet, investors and other stakeholders can understand the assets, liabilities and owners' equity of the company, so as to evaluate the company's operating conditions and future development trends. In the balance sheet, you can judge whether the enterprise is profitable or loss-making through the analysis of the following aspects:
Comparison of total assets and total liabilities:
The left side of the balance sheet shows the total assets of the business, while the right side shows the total liabilities and owners' equity. If the total assets are greater than the total liabilities, it means that the company has sufficient assets to cover its liabilities, which is an important sign of the sound operation of the enterprise.
If the total assets are much smaller than the total liabilities, it may mean that the business is at greater risk of servicing debts and may even become insolvent.
Comparison of current assets and current liabilities:
Current assets refer to assets that are realized within a year or within a business cycle, while current liabilities refer to liabilities that need to be repaid within a year or within a business cycle.
If the current assets are greater than the current liabilities, it means that the enterprise has sufficient short-term solvency. Conversely, if the current assets are less than the current liabilities, it may mean that the short-term debt repayment pressure of the enterprise is greater.
Change in Owner's Equity:
Owner's equity refers to the net amount of a business's assets after deducting liabilities. If the owner's equity increases, it means that the business has gained more capital, perhaps due to earnings or the investment of funds by external investors.
If the owner's equity decreases, it may mean that the business has incurred a loss or paid dividends.
Asset Turnover vs. Profit Margin:
By comparing the asset turnover ratio (revenue, average total assets) and profit margin (profit, revenue), it is possible to understand the operating efficiency of the enterprise. If a company's asset turnover ratio is high and its profit margin is low, it may indicate that the company's operating efficiency is higher but its profitability is weaker. Conversely, if a company's asset turnover is low and its profit margin is high, it may indicate that the company's operating efficiency is low but its profitability is strong.
Accounts receivable and inventory increases:
An increase in accounts receivable may mean that the company's sales revenue has not actually arrived, while an increase in inventory may indicate that the business is not salable or has an overstock. All of these situations can have a negative impact on a company's bottom line.
Depreciation and amortization of fixed assets:
Depreciation and amortization of fixed assets are fixed expenses for a business, and if these expenses are high, it may affect the profitability of the business.
Changes in long-term investments:
Long-term investments may involve equity investments or other forms of investment in other companies. The increase or decrease of long-term investment can help determine whether a company is looking for new profit growth points or risky investment opportunities.
Change in cash flow from operating activities:
The ability of a company to earn cash through operating activities can be judged by the cash flow generated by operating activities. If cash flow is consistently negative or fluctuates significantly, it may indicate that the profitability of the business is unstable.
To sum up, through the analysis of multiple accounts in the balance sheet, it can help to determine whether the business is profitable or loss-making. However, please note that the balance sheet only provides financial information at a specific point in time, and in order to fully assess the financial position and operating performance of the company, it needs to be analyzed in conjunction with other financial statements and the external environment. If in doubt or need professional advice, it is advisable to consult a professional accountant or financial advisor.