Introduction
Ask ten stock market beginners what they check before buying a share, and most will say price, news or a tip from a friend. Very few will say “the balance sheet.”
That is a pity, because the balance sheet answers the questions that matter most for survival: Does this company have enough money to pay its bills? How much debt is it carrying? What does it actually own?
A company can report rising profits and still run into trouble if its debt is too heavy or its cash is locked up in unsold inventory and unpaid customer bills. The balance sheet is where that kind of stress shows up first.
Think of it like a medical report for a business. The profit and loss statement tells you how the company performed over a year, like a fitness tracker. The balance sheet is the health check on a specific day: it shows what the company owns, what it owes, and what is left for the owners.
This is Part 1 of our Learning Series on reading financial statements. By the end, you will be able to open any Indian company’s annual report and understand its structure, read it in the right order, and calculate two simple ratios.
What Is a Balance Sheet?
A balance sheet is a financial statement that shows a company’s financial position on a single date, usually 31 March for Indian companies, since the financial year runs April to March.
It is built on one simple rule, the accounting equation:
Assets = Liabilities + Shareholders’ Equity
In plain words:
- Assets: what the company owns
- Liabilities: what the company owes to others
- Equity: what belongs to the shareholders after all debts are settled
Rearranged, equity is simply what is left over: Equity = Assets − Liabilities.
Simple example: If a company owns assets worth ₹50 crore and owes ₹30 crore to lenders and suppliers, the shareholders’ equity is ₹20 crore. The two sides must always balance, which is exactly why it is called a balance sheet.
How an Indian Balance Sheet Looks: The Schedule III Format
In India, companies prepare their balance sheets in the vertical format prescribed by Schedule III of the Companies Act, 2013. This standard layout is a gift to investors, because every company presents its numbers in the same order, which makes comparison easier.
The layout has two blocks:
- Equity and Liabilities (the top block)
- Assets (the bottom block)
Both blocks add up to the same total. Most listed companies follow the Ind AS version of the format, and each line usually shows the previous year’s number next to the current year’s, along with a note number pointing to more detail in the notes to accounts.
One small tip: Schedule III controls how numbers are presented. It does not tell you whether a company is healthy. That judgement is yours.
Part A: Assets (What the Company Owns)
Assets are split into non-current (long-term) and current (short-term, expected to turn into cash within 12 months).
Non-current assets
Item What it means Property, plant and equipment (PPE) Land, buildings, machinery, vehicles Capital work-in-progress (CWIP) Assets still under construction or installation Intangible assets Software, licences, patents, brands Non-current investments Long-term holdings in other companies Other non-current assets Long-term deposits, advances and similar items
Current assets
Item What it means Inventories Raw materials, work-in-progress, finished goods Trade receivables Money customers owe the company for goods already sold Cash and bank balances Cash in hand and bank deposits Other current assets Short-term advances, prepaid expenses and similar items
What to look for: In a manufacturing company, a large share of PPE is normal. But if inventories and receivables are growing much faster than sales, cash may be getting stuck in the business, which is something to investigate.
Part B: Liabilities (What the Company Owes)
Liabilities are also split into non-current and current.
Non-current liabilities (due after 12 months)
- Long-term borrowings: Term loans, debentures, bonds
- Lease liabilities: Under Ind AS, many leases that used to sit outside the balance sheet now appear as liabilities
- Deferred tax liabilities: Taxes that will be payable in future
- Long-term provisions: Employee benefits and similar obligations
Current liabilities (due within 12 months)
- Short-term borrowings: Working capital loans, cash credit
- Trade payables: Money the company owes its suppliers
- Other current liabilities: Statutory dues, advances from customers
- Short-term provisions
What to look for: The key question is whether the company can meet what is due in the next 12 months. If short-term liabilities are much larger than short-term assets, that is a liquidity warning sign, even if the company looks solid on paper.
Part C: Shareholders’ Equity (What Belongs to Owners)
Equity usually has two main parts:
- Share capital: The face value of shares issued to investors
- Other equity (reserves and surplus): Accumulated profits that the company has kept in the business over the years, plus items like securities premium
Added together, they give you the company’s net worth.
What to look for:
- Growing equity over time usually means the company is retaining profits and building value.
- Shrinking equity may signal losses or heavy payouts.
- Negative equity (liabilities larger than assets) is a serious red flag. It means accumulated losses have eaten into the owners’ capital.
How to Read a Balance Sheet: A 6-Step Method
Do not start at the top and read randomly. Use this order:
- Check that it balances. Total assets must equal total equity plus liabilities.
- Look at net worth (equity). Is it growing year after year?
- Compare current assets with current liabilities. This tells you about short-term safety.
- Look at borrowings. How much debt is there, and is it rising?
- Study the asset mix. Is the company asset-heavy (factories, machines) or asset-light? Are inventories and receivables ballooning?
- Read the notes to accounts. Important risks such as contingent liabilities, capital commitments and related-party balances sit mainly in the notes, not on the face of the balance sheet.
Always compare at least three to five years. A single balance sheet is a photograph; a series of them is a film.
A Worked Example (Illustrative Company)
Let us read a fictional manufacturing company, ABC Castings Ltd, using simple numbers in ₹ crore. This is only an example for learning and does not represent any real company.
Equity and Liabilities
Item ₹ crore Share capital 10 Other equity (reserves) 90 Total equity100 Long-term borrowings 40 Lease liabilities 5 Deferred tax liabilities 5 Total non-current liabilities50 Short-term borrowings 25 Trade payables 35 Other current liabilities 15 Total current liabilities75Total equity and liabilities225
Assets
Item ₹ crore Property, plant and equipment 110 Capital work-in-progress 10 Other non-current assets 5 Total non-current assets125 Inventories 50 Trade receivables 35 Cash and bank balances 15 Total current assets100Total assets225
Step 1: Both sides total ₹225 crore, so the sheet balances.
Two quick ratios
1. Current ratio = Current assets ÷ Current liabilities
= 100 ÷ 75 = 1.33
This means the company has ₹1.33 of short-term assets for every ₹1 of short-term obligations. A ratio above 1 is generally comfortable, but the right level varies by industry.
2. Debt-to-equity ratio = Total borrowings ÷ Shareholders’ equity
= (40 + 25) ÷ 100 = 0.65
The company has ₹0.65 of borrowings for every ₹1 of owners’ money. Lower values usually mean less financial risk, but again, compare with similar companies in the same sector.
A closer look (quick ratio): If we remove inventories, which can take time to sell, we get (100 − 50) ÷ 75 = 0.67. This tells us the company would find it harder to meet short-term bills if inventories got stuck. A big gap between the current ratio and the quick ratio is worth noting.
Common Beginner Mistakes
- Reading only the latest year. Trends matter more than a single snapshot.
- Ignoring the notes. Many risks are not shown on the face of the balance sheet.
- Comparing across industries blindly. A bank, a software firm and a foundry have very different balance sheets.
- Treating “cash-rich” as always good. Ask why the company is sitting on cash and what it plans to do with it.
- Focusing only on profit. Profit without healthy cash flow and a sound balance sheet can be misleading.
Conclusion
The balance sheet may look like a wall of numbers at first, but it follows a simple logic: what the company owns, what it owes, and what is left for the owners. Once you learn to read it in the right order, it becomes one of the most powerful filters in your investing toolkit.
Here at Hivest Money, we believe good investing starts with understanding the basics before chasing returns. In Part 2, we will move on to the profit and loss statement and see how it connects with the balance sheet. Until then, pick one company you follow, open its latest annual report, and try the 6-step method. Practice is the fastest way to build confidence.
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Frequently Asked Questions (FAQs)
1. What is a balance sheet in simple words?
A balance sheet is a snapshot of what a company owns (assets), what it owes (liabilities) and what is left for shareholders (equity) on a particular date.
2. Why must a balance sheet always balance?
Because every asset is financed either by borrowed money (liabilities) or by owners’ money (equity). That is why Assets always equal Liabilities plus Equity.
3. What is the Schedule III format?
Schedule III of the Companies Act, 2013 prescribes the standard vertical format that Indian companies must use for their balance sheet and profit and loss statement. It improves consistency and makes comparison easier.
4. What is a good current ratio?
A ratio above 1 generally suggests that short-term assets cover short-term liabilities, but the ideal level differs by industry. Always compare with peers and with the company’s own history.
5. Where can I find a company’s balance sheet?
You can find it in the company’s annual report on its website, on the BSE and NSE websites under corporate filings, and on most stock research platforms.
6. Is a company with high debt always risky?
Not always. What matters is whether the company earns enough to comfortably pay interest and repay loans. Some capital-intensive businesses naturally carry more debt. That is why debt should be judged together with earnings and cash flow.
7. What is the difference between a balance sheet and a profit and loss statement?
The balance sheet shows financial position on one date, while the profit and loss statement shows performance over a period such as a year. You need both for a complete picture.
Disclaimer
This article is published by Hivest Money for educational and informational purposes only. The company used in the example is fictional and the numbers are illustrative. Nothing here constitutes investment, financial, legal or tax advice, or a recommendation to buy, sell or hold any security. Investments in securities markets are subject to market risks. Please do your own research and consult a SEBI-registered investment adviser before making any investment decision. Hivest Money and its author are not responsible for any losses arising from decisions based on this content.
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