There are many important terms on the balance sheet. How do you know that a balance sheet is developing well in the long run? How can you evaluate the balance sheet as financially healthy or unhealthy? Well, there are many things that you need to look at. First of all, the trend in balance sheet items has great importance.
When a company is earning money and is developing very positively in terms of growth and stability, it will also be registered on the balance sheet. If you look from a historical perspective, you should see an increase in total current assets and total assets. We are talking about growth.
The same will be applied to the liabilities and equity side of the ledger. As there is a simple rule, assets = liabilities + equity, so it will undoubtedly do the same. But what is better and what does it mean? Of course, it is better if we can see growth in equity. We have been talking about what can influence equity in the previous capitol. The increase in shareholder equity is a precious sign for many reasons.
According to Investopedia: “Shareholder equity is the owner’s claim after subtracting total liabilities from total assets. Positive shareholder equity means the company has enough assets to cover its liabilities, but the company’s liabilities exceed its assets if it is negative. Shareholder equity gives analysts and investors a clear picture of the financial health of a company.”
A positive trend in equity always represents a great sign for investors in the long run, as it means the company is creating value and is increasing the buffer in equity (in case of bad scenarios).
Well, growth in liabilities can not always be referred to as a lousy sign. The company needs additional sources of financing to complete the other companies. It needs this kind of financing for further development, R&D, CAPEX / OPEX. With an increase in the assets side, there is an enormous certainty of rising the liabilities side as well, but what is highly appreciated – if equity grows too (with a higher or equal path). From a practical point of view, we will explain all these texts “visually” in our case studies.