The balance sheet reflects a company's assets, liabilities, and owners' equity that can be measured in monetary terms at a given point in time. The balance sheet is a snapshot of the financial position at a particular point in time, and it reflects just that moment in time. It is divided into 3 sections: assets, liabilities and owners' equity.
Assets = Liabilities + Owners' Equity
The balance sheet reflects only the assets of a company that can be measured in monetary terms, not all of them. For example, a company's excellent corporate culture and reputation are very important intangible assets, but these assets are not reflected on the balance sheet because they cannot be measured in monetary terms.
I. Structure of the Balance Sheet
Assets are the use of money, and liabilities and owner's equity are the source of money.
Assets are the use of money, something that has some value in the present or can provide value in the future. They are generally divided into two categories: current assets and fixed assets:
Current assets include cash and other things that are intended to be used or sold within a year, such as cash on the books or merchandise on the shelves
Fixed assets are physical assets that can be used for more than a year, such as a vehicle, a machine, or a property.
Liabilities are money borrowed or taken from creditors. Your business owes money to someone or another business.
Current liabilities are debts you have to pay off within a year, such as taxes, purchase bills, and employee compensation. It can also include loans and rents that are due to be paid within a year
Long-term liabilities are debts with a maturity of more than one year, which can include outstanding remaining loans or rents that need to be paid
Owners' equity represents the portion of a company's assets that is attributable to the company's shareholders after deducting the company's liabilities.
Ordinary shares/share capital: the shares of this company held by the owners of a shareholding business. Owners of non-stock micro-enterprises may not hold stock, but have ownership rights. On the balance sheet, this item represents funds to which the owners of the company can claim rights.
Undistributed profits: when a company makes money, it can either distribute the money to shareholders or it can keep the money (i.e., retain those profits) to add value to its assets or to pay off its liabilities. When a company retains profits, this money should be shown on the balance sheet under owner's equity.
II. Interpretation of Balance Sheet Structure and Accounts
III. The Role of the Balance Sheet and the Logic of Analysis
For the convenience of the investor, the assets are classified into four categories, namely, money and funds, operating and production related assets, and investment related assets.
In order to take care of creditors (such as banks), it is convenient for creditors to quickly assess the long-term and short-term solvency of the enterprise. Liabilities are categorized according to their source into three categories: operating liabilities, distributive liabilities, and financing liabilities.
Fourth, liabilities and owner's equity
(a) Owner's equity
Owner's equity and liabilities in the balance sheet tell us the source of the company's funds? If the money is invested by shareholders or occupied by shareholders, it is owner's equity. Owners' equity consists of four components, namely paid-up capital, capital surplus, surplus and undistributed profits.
The money invested by the shareholders forms share capital (or paid-up capital) and capital surplus - share capital premium (or capital surplus - capital premium).
Occupying shareholders' money refers to the money earned by the company in the operation of the company to the company's shareholders, including surplus reserves and undistributed profits, other comprehensive income. In order to have a better development, the company leaves a part of the money first not to share to the shareholders, but to use this part of the money to continue to expand, for the shareholders to earn more money in the future
(b) Liabilities
If the source of funds is the creditor to form the company's liabilities, the liabilities have the following two classifications:
One is to source of the liabilities are classified as operating liabilities, distributive liabilities and financing liabilities;
The second is whether or not interest is borne, which is classified as interest-bearing liabilities and non-interest-bearing liabilities.
Operating liabilities arise along with the business activities of enterprises, such as accounts payable, notes payable, etc. Operating liabilities are characterized by the absence of interest, it is the listed company occupies the money of suppliers or customers, the more of these payments, the stronger the position of the enterprise in the industry chain. Operating liabilities include: notes payable, accounts payable, advance receipts, employee compensation payable, and taxes payable.
Distributive liabilities arise along with the earnings of the enterprise, mainly referring to dividends payable and income tax payable.
Financing liabilities include all forms of long and short-term borrowings. Operating and distributive liabilities are usually interest-free, while financing liabilities are generally interest-bearing.
1. Non-interest-bearing liabilities
Non-interest-bearing liabilities generally refer to the formation of advance receipts from dealers who pay first and then take delivery of the goods, as well as the formation of bills payable and accounts payable to the supplier to defer payment, to put it in a more general way, non-interest-bearing liabilities is to owe money to upstream and downstream industry chain, to do their own business.
Non-interest-bearing liabilities, we focus on long-term accounts payable; long-term accounts payable is payable over a long period of time, and long-term accounts payable in the accounting business refers to a variety of long-term accounts payable in addition to long-term loans and bonds payable. The main ones are payable for the introduction of equipment in compensatory trade and payable for lease payments for fixed assets leased under finance leases.
Higher long-term payables are most likely an indication that the company is short of money.
1. Compensatory trade in equipment, is the use of the equipment processing and assembly income and export products for the return of equipment payable, which is also accompanied by interest payments, in fact, is the lack of money for the enterprise does not have enough money for the purchase of equipment.
2. Finance lease payable and the financing nature of the deferred payment for the purchase of assets, both of which also indicates a lack of money. Because these two have the nature of financing, often accompanied by financing interest rates, that is, the cost of financing is to pay additional interest.
3. Payable sale and leaseback, this item is even more indicative of the lack of money, the enterprise first sold their assets, and then leased back to increase the current funds, in other words, the company to the lessor financing.
2. Interest-bearing liabilities
Interest-bearing liabilities, including long-term bank borrowings, the issuance of bonds, etc., which is characterized by the more liabilities need to pay the higher cost of capital.
Therefore, in general, the smaller the amount of interest-bearing liabilities, the better, and the larger the amount of non-interest-bearing liabilities, the better, good companies tend to have very little interest-bearing liabilities, and non-interest-bearing liabilities tend to be more
Interest-bearing liabilities = short-term borrowings + long-term borrowings + bonds payable + non-current liabilities due in one year
We subtracted the money funds from the interest-bearing liabilities, and subtracted the trading financial assets, and we got the net interest-bearing liabilities. and we get net interest-bearing liabilities.
Net Interest Bearing Liabilities = Interest Bearing Liabilities - Quasi Monetary Funds
Quasi Monetary Funds = Monetary Funds + Trading Financial Assets + Wealth Management Products in Other Current Assets + Structured Deposits in Other Current Assets
Net Interest Bearing Liabilities reflects the quality of a company's funding chain. If Net Interest Bearing Liabilities is negative, it means that the company is relatively cash rich. That means the cash on the books + money from the balance sheet and stocks can pay off all the interest-bearing liabilities.
Wanhua Chemical's net interest-bearing liabilities are 33.1 billion yuan; the company is still relatively short of money, and this time we have to check the notes to see if the company has any overdue borrowings and the company's borrowing annual interest rate. These two indicators are clear warning signals;
Through the notes of Wanhua Chemical's 2020 annual report, no overdue borrowings were found.
The interest rate on the company's long-term borrowings is between 0.1% and 4.9%, which is within the normal interest rate range.
Let's take a look at the overall cost of debt for WHC;
Interest-bearing debt rate = interest expense/average debt*100%
Interest expense, we look at "finance costs" in the notes, and we can see that the interest expense for the current period amounted to 1.65 billion yuan. The amount of interest-bearing liabilities, due to the beginning and end of the period changes, we calculate the arithmetic average size of interest-bearing liabilities in 2020; 2020 the end of the period of interest-bearing liabilities of 50.7 billion, the beginning of the period of interest-bearing liabilities of 29.3 billion in 2020, the annual average size of interest-bearing liabilities of 40 billion; calculated in 2020, the overall interest rate of the liabilities of the Wanhua Chemical is 4.1% (16.5/400 = 4.1%). The overall interest expense cost is relatively high, but the interest rate of interest-bearing debt is within a reasonable range.
We further analyze Wanhua Chemical's short-term solvency and whether the company has a debt crisis.
Difference between money funds minus short-term interest-bearing liabilities = money funds - (short-term borrowings + non-current liabilities due within one year)
A financially sound company should be able to cover its short-term interest-bearing liabilities with its money funds. The numerator "Money Funds" in the Cash Coverage of Interest-bearing Liabilities indicator can be relaxed to "Quasi Money Funds" Quasi Money Funds, if able to cover interest-bearing liabilities, indicate that the company can at least survive in the event of an emergency.
Wanhua Chemical's money funds minus short-term interest-bearing liabilities have been zero for the past five years, and Wanhua Chemical's short-term debt service level has been in a relatively tense state. 2020 short-term interest-bearing liabilities cash security multiples have been substantially improved. Short-term debt service capacity has improved.
Gearing ratio, we can know through the analysis of liabilities can be divided into two categories, non-interest-bearing liabilities and interest-bearing liabilities. Therefore, the gearing ratio can be decomposed into:
Liabilities/Total Assets = Assets Interest-bearing Liability Ratio + Assets Non-interest-bearing Liability Ratio Interest-bearing Liability/Total Assets + Non-interest-bearing Liability/Total Assets.
If a company is in a strong position in the industry chain, its high gearing is not terrible, or even good, because most of the "interest-free liabilities/total assets" is larger, which shows that the company can be through the "accounts payable",
Therefore, when analyzing a company's debt risk, the EBITDA is arguably the more valuable debt ratio, and the EBITDA should be compared to other companies in the same period and industry. Be wary of companies with relatively high interest-bearing debt ratios. If interest-bearing debt exceeds 60% of total assets, the company is considered relatively aggressive. If it encounters a sudden change in the macro or industry, it is more likely that the enterprise will fall into trouble. Therefore, we eliminate companies with an interest-bearing debt ratio of 60%.
(Continued from .....)
Follow not lost, more dry goods sharing, welcome to pay attention to "a few inkstone investment notes" WeChat public number!
"Related Readings"
Getting Started with Financial Report Analysis
Reading Annual Reports (1) Wanhua Chemical
Reading Annual Reports (2.2) Wanhua Chemical
Reading Annual Reports (2.1) Wanhua Chemical
Reading Annual Reports ( 2.3) Wanhua Chemical
Read and understand how to valuation in one article - Myriad Healthcare
Zhonggong Education individual stock analysis - three valuation methods of practical application
How to correctly understand the value and meaning of the stock investment