Balance sheet

A summary of a company's finances, including its assets, liabilities and shareholder equity.

What is a balance sheet?

A balance sheet is a document that summarises a company’s finances. It will include its assets, liabilities and shareholder equity.

Investors will look at a balance sheet in conjunction with the rest of a company's financial statement in order to get a picture of its finances. In turn, that information can be used to guide investment decisions.

A healthy balance sheet might be a positive sign for investors and lead them to put money into a company. Conversely, a balance sheet that shows a business has bad finances could mean investors want to sell their shares in that firm or not invest in it at all.


Understanding a balance sheet

Balance sheets aren’t tricky to understand but you do need to know a few financial concepts in order to do so. Those are assets, liabilities and shareholder equity.

What are assets?

Assets are things that companies own. A company might hold cash , real estate and stocks. All of these things would be considered assets.

When you look at a balance sheet, you’ll often see a company’s assets ordered according to their liquidity. In a financial context, liquidity refers to how easily an asset can be exchanged for cash.

Knowing how liquid a company’s assets are is important because it will need to pay its liabilities with cash. So if a company has to pay off a lot of liabilities in the short-term, it will need assets that it can easily convert into money.

Because of this, balance sheets will often divide assets into two categories  — current assets and non-current assets.

Current assets are things that you can expect to be converted into cash in under a year, like cash or stocks.

Non-current assets are things that are more likely to take over a year to be converted into cash, like large real estate holdings or machinery.


What are liabilities?

Liabilities are the debts that a company has. For example, if a firm borrows money from a bank, that loan is listed as a liability on its balance sheet.

Like assets, liabilities are often arranged into two categories — current liabilities and long-term liabilities.

As the name suggests, current liabilities are shorter-term cash payments that a company will have to make. For example, if you have a loan that needs to be paid within a year, that would be a short-term liability.

Long-term liabilities are the opposite. They’re payments that a company will have to make in over a year’s time.


How are balance sheets useful for investors?

Balance sheets provide a snapshot into a company’s finances and can give investors an approximate idea of how a business is performing. That can help them make better investment decisions.

Still, like most pieces of financial information, the balance sheet should be looked at in conjunction with other data because it only captures part of a company’s story. Moreover, companies have been known to play with the data they put into their balance sheets to make them look more favourable — so look out!

More terms

Ponzi Scheme

A form of fraud designed to lure new investors, and pays the earlier backers by using the new investors' money.
Read more

Accrued interest

The interest earned on a gilt since the last dividend date. When buying a gilt, the buyer pays the accrued interest at the time of a transaction to the seller in addition to the clean price of the gilt
Read more

Internal Rate of Return (IRR)

A means of calculating the potential future return on an investment.
Read more

Inflation

The increase in the prices of goods and services over time, and the process by which money loses its value.
Read more

Profit and Loss Statement (P&L)

A statement that summarises firm's expenses, costs, and revenues incurred during a time period. AKA income statement.
Read more

Unicorn

A startup valued at over £1 billion. They are rare, hence the name.
Read more

Balance sheet

A summary of a company's finances, including its assets, liabilities and shareholder equity.
Read more

Spot Rate

The currency exchange rate a bank quotes, valid with immediate effect.
Read more

Year to Date (YTD)

A period of time that starts with the first day of the current calendar year and ends with today.
Read more
Compare plans

Pick the plan that suits you best

Save 17% when you choose an annual subscription.
Freetrade basic plan icon with one star on a black circle
Basic
£0.00
/Mo.
 
Get basic
Accounts include
  • Outline icon of a bank

    General investment account

  • icon of a banknote

    Stocks and shares ISA

    New
Benefits include
  • Freetrade logo icon

    Commission-free investing in 6,500+ UK, US, and European stocks, ETFs, and more

  • icon of a coin that has a dollar symbol inside a circle

    FX fee of 0.99% on non-GBP trades

  • icon of a stack of coins

    1% AER on up to £1k uninvested cash

Standard
£4.99
/Mo.
£59.88 billed annually
Accounts include
  • Outline icon of a bank

    General investment account

  • icon of a banknote

    Stocks and shares ISA

Benefits include
  • Freetrade logo icon

    Commission-free investing in 6,500+ UK, US, and European stocks, ETFs, and more

  • icon of a coin that has a dollar symbol inside a circle

    FX fee of 0.59% on non-GBP trades

  • icon of a stack of coins

    3% AER on up to £2k uninvested cash

  • Icon of a pie-chart
Plus
£9.99
/Mo.
£119.88 billed annually
Accounts include
  • Outline icon of a bank

    General investment account

  • icon of a banknote

    Stocks and shares ISA

  • Outline of a piggybank

    Personal pension (SIPP)

Benefits include
  • Freetrade logo icon

    Commission-free investing in 6,500+ UK, US, and European stocks, ETFs, and more

  • icon of a coin that has a dollar symbol inside a circle

    FX fee of 0.39% on non-GBP trades

  • icon of a stack of coins

    5% AER on up to £3k uninvested cash

  • Icon of a pie-chart
Freetrade basic plan icon with one star on a black circle
Basic
£0.00
/Mo.
 
Get basic
Accounts include
  • Outline icon of a bank

    General investment account

  • icon of a banknote

    Stocks and shares ISA

    New
Benefits include
  • Freetrade logo icon

    Commission-free investing in 6,500+ UK, US, and European stocks, ETFs, and more

  • icon of a coin that has a dollar symbol inside a circle

    FX fee of 0.99% on non-GBP trades

  • icon of a stack of coins

    1% AER on up to £1k uninvested cash

Standard
£5.99
/Mo.
billed monthly
Accounts include
  • Outline icon of a bank

    General investment account

  • icon of a banknote

    Stocks and shares ISA

Benefits include
  • Freetrade logo icon

    Commission-free investing in 6,500+ UK, US, and European stocks, ETFs, and more

  • icon of a coin that has a dollar symbol inside a circle

    FX fee of 0.59% on non-GBP trades

  • icon of a stack of coins

    3% AER on up to £2k uninvested cash

  • Icon of a pie-chart
Plus
£11.99
/Mo.
billed monthly
Accounts include
  • Outline icon of a bank

    General investment account

  • icon of a banknote

    Stocks and shares ISA

  • Outline of a piggybank

    Personal pension (SIPP)

Benefits include
  • Freetrade logo icon

    Commission-free investing in 6,500+ UK, US, and European stocks, ETFs, and more

  • icon of a coin that has a dollar symbol inside a circle

    FX fee of 0.39% on non-GBP trades

  • icon of a stack of coins

    5% AER on up to £3k uninvested cash

  • Icon of a pie-chart

You’re just minutes away from commission-free investing

When you invest, your capital is at risk