Take a look at a table to uncover the company's assets and debts!

Financial leverage, or debt operation, is like a double-edged sword.

On one hand, through borrowing, companies can quickly expand their operation scale.

However, if a company has too much debt, it may face financial risks.

Where can you see how much debt a company has?

The answer is the balance sheet.

The balance sheet is one of the three major financial statements, consisting of three parts: assets, liabilities, and shareholders' equity.

Assets refer to valuable items held by the company.

A company's assets include tangible assets such as factories, equipment, inventory, etc.

It also includes intangible assets, such as patents and trademarks. Cash is also one of the company's assets.

These assets can be further categorized into current assets and non-current assets based on their ability to be converted into cash.

Current assets refer to assets that can be converted into cash within one year. Non-current assets refer to assets that take a year or more to be converted into cash.

Next is liabilities.

Liabilities refer to the money that the company owes to others.

For example, borrowing money from banks, owing money to suppliers, and owing salaries to workers, etc.

Liabilities can be classified into current liabilities and long-term liabilities based on the repayment date. Debts that need to be repaid within one year are considered current liabilities, while debts with a maturity date of more than one year are classified as long-term liabilities.

Liabilities can be classified into current liabilities and long-term liabilities based on the repayment date. Debts that need to be repaid within one year are considered current liabilities, while debts with a maturity date of more than one year are classified as long-term liabilities.

Lastly, it is the shareholder's equity.

It refers to the money left after a company sells all its assets and repays all its debts.

This money ultimately belongs to the company's owners or shareholders.

On a balance sheet, you will find that a company's assets equal liabilities plus shareholders' equity.

This is what we commonly refer to as the accounting equation, where assets equal liabilities plus shareholders' equity.

This formula always balances out because the money used by a company to pay for its assets either comes from borrowing or from financing obtained from investors.

Investors can understand a company's financial health by reading the balance sheet.

There are many methods and tools for analyzing the balance sheet, and one commonly used indicator is the asset-liability ratio.

The asset-liability ratio refers to the proportion of a company's total liabilities to its total assets.

It is an important indicator of a company's long-term debt-paying ability.

Generally, if the asset-liability ratio is less than 1, it means that the company owns more assets than liabilities, and can fulfill its obligations by selling its assets when needed. The lower the asset-liability ratio, the lower the company's risk.

If the asset-liability ratio equals 1, it means that the company has the same amount of liabilities as assets. This indicates a high leverage ratio and relatively high financial risk for the company.

If the asset-liability ratio exceeds 1, it means that the company's liabilities exceed its assets. The financial risk is very high, and the company may face bankruptcy.

However, in practical situations, the assessment of a company's financial risk cannot be solely based on the level of the asset-liability ratio.

The asset-liability ratios vary greatly across different industries. This is related to the company's business model.

For example, banks and other financial institutions generally have high asset-liability ratios because they take in deposits and then lend to customers.

Other industries with higher asset-liability ratios are generally capital-intensive industries, such as public utilities, transportation, and the energy industry.

Therefore, investors should combine a comprehensive assessment of the company's industry when analyzing the company's asset-liability ratio.

In summary, the balance sheet is one of the company's three major financial statements, showing the company's assets, liabilities, and shareholders' equity.

Investors can use the asset-liability ratio to measure the company's debt situation. If a company's asset-liability ratio is very high, it may be a dangerous signal because a large portion of the company's profits needs to be used to repay debts.

This episode of the video ends here, see you in the next episode.