How to read a balance sheet

What a balance sheet is — and isn't

A balance sheet captures your company's financial position at a single moment — usually the year-end. Unlike a profit & loss statement, which covers a period of trading, the balance sheet is a still photograph: what you own, what you owe, and the difference between them on that day.

It always obeys one identity: assets = liabilities + equity. Everything the company controls is funded either by money it owes (liabilities) or by money the owners have put in or left in (equity). The two sides balance by definition — hence the name. Once you understand that the sheet must reconcile, reading it becomes a matter of asking where the value sits and how it's funded.

Assets: what the company owns

Assets are split by how quickly they turn into cash. Fixed (non-current) assets are held for the long term — premises, plant, vehicles, equipment, and intangibles like goodwill. Current assets are short-term and expected to convert within a year:

• Cash at bank and in hand.
• Receivables — money customers owe you.
• Stock or inventory awaiting sale.

The mix matters as much as the total. A business rich in stock but thin on cash can still struggle to pay its bills. When you read the asset side, you're really asking: how much of this could meet an obligation this month, and how much is locked up?

Liabilities and equity: how it's funded

Liabilities mirror the asset split. Current liabilities fall due within a year — trade creditors, VAT, PAYE, the next twelve months of any loan. Long-term liabilities sit beyond that, such as the remainder of a term loan or asset finance.

What's left after every liability is settled is equity — share capital plus accumulated retained profit. This is the shareholders' stake, and it's the cushion that absorbs a bad year. A company with healthy retained earnings has built genuine resilience; one running on negative reserves is leaning entirely on its creditors. The relationship between borrowed money and owners' funds is your gearing, and it's a number lenders watch closely.

The ratios that matter

A few quick calculations turn raw figures into judgement. The essentials:

• Net assets (total assets − total liabilities) — is the company worth more than it owes? Negative net assets is a red flag.
• Current ratio (current assets ÷ current liabilities) — can short-term assets cover short-term debts? Around 1.5 is comfortable for most trades.
• Quick ratio — the same test but excluding stock, which can be hard to shift fast.
• Gearing — debt relative to equity, showing how leveraged the business is.

These ratios are most useful read as a trend across two or three years. A current ratio sliding from 1.8 to 1.1 tells a story that a single year never could.

What a lender looks for

When you apply for finance, an underwriter reads the balance sheet for solvency and resilience. They want positive net assets, sensible gearing, and enough current assets to meet current liabilities without strain. Strong retained earnings signal a business that has weathered cycles and kept something back.

That said, a balance sheet is only half the picture — it shows position, not flow. A lender like Credicorp pairs it with your live bank activity and trading performance to judge affordability, and lends to the company rather than the director personally, with no personal guarantee. Before you apply, tidy the sheet: clear small creditors, file on time, and make sure it presents the genuine strength of the business. Our guide on preparing for a finance application walks through the rest.