Balance sheet analysis: Concept and importance

Situation balance analysis: Concept and ImportanceThe balance sheet analysis is usually the starting point chosen in the valuation process of a company. Is annual account It shows us the financial situation of the company, from which we can obtain very valuable information to get an idea of ​​the solidity of the business. In this introductory article on balance sheet analysis we will see what a balance sheet is and its importance in the valuation process.

What is the situation balance?

The balance sheet is one of the annual accounts that listed companies must present. In it, the financial situation of the company is shown at a given time, separating the assets (the assets that the company has subject to valuation) and the liabilities (the method of acquiring these assets, either with funds from its investors or with debts).

Importance of situation balance analysis

The balance sheet analysis is essential, as it will help us answer key questions when assessing a company, such as:

  • How much money does the company have in cash?
  • What properties does the company have?
  • How much money do you owe?
  • Does the company have enough cash to meet its short-term commitments?

In which cases is balance sheet analysis key?

The balance sheet analysis is usually the starting point in the valuation process of a company, since it helps us to get an idea of ​​its financial situation. I always recommend it as the first step when analyzing and evaluating a company.

However, in some cases the balance sheet analysis is not just a starting point, it will be the center of the valuation process. For example, in the case of holding company valuation, the value of the company will be the sum of the value of its parts. Another case is the companies that are going to be liquidated in the near future.

An example of this type of company in which equity analysis is key is Alba Financial Corporation, the company with the shareholdings of Banca March. To value the company, all we have to do is add the value of the business shares and subtract the debts of the company.

For those of you who are curious to see a simple analysis based on the balance, I leave you my valuation of Corporación Financiera Alba that I posted on Gurusblog a while.