Reading the Balance Sheet
By Rohit Singh · Mr. Chartist, SEBI Registered Research Analyst
A balance sheet is a photograph of a company on one single day, usually 31 March. It lists what the company owns, what it owes, and what is left for its owners. Think of your own household: your flat, gold, savings and scooter on one side, and your home loan and credit card dues on the other. What remains is your net worth. A company's balance sheet does the same job in a fixed format. This page reads one line by line, using an illustrative company, so you can see what each line means, what it can tell you and, just as important, what it cannot.
What does a balance sheet actually show?
The income statement is a film of a whole year. The balance sheet is one still frame, taken at the close of business on the last day of the year or quarter. It answers two plain questions. What does the company own? And who paid for it?
A kirana owner can do the same on Diwali night. Stock on the shelves, money in the drawer and amounts customers still owe him are what he owns. Money he owes the wholesaler and the bank loan he took to expand the shop are what he owes. If he subtracts what he owes from what he owns, the rest is his own money in the business.
That last figure is the most important idea on this page, and the next block gives it a name.
- Asset
- Something the company owns or is owed, which it expects to use or turn into money: machines, stock, cash, dues from customers.
- Liability
- Something the company owes to someone outside the owners: a bank loan, a supplier's bill, tax due, a lease payment.
- Equity (net worth, shareholders' funds)
- What is left for the owners after every liability is subtracted from every asset. It is the owners' money in the business: the capital they put in plus the profits the company has kept.
Why does a balance sheet always balance?
Because it counts the same thing twice, from two directions. Every rupee the company holds as an asset had to come from somewhere. It came from the owners, from lenders or from suppliers and others who are yet to be paid. So the total of what it owns must equal the total of what funded it. Accountants call this the accounting equation.
For Bharat Cables Ltd (an illustrative company, not a real one), the assets on 31 March 2025 add up to ₹1,012 crore. The owners' money is ₹448 crore. Loans are ₹390 crore. Suppliers and other dues make up the remaining ₹174 crore. The three funding sources also total ₹1,012 crore.
A balance sheet that does not balance is not a bargain or a clue. It means an error, and listed companies' published statements are audited precisely so that this does not happen. The useful question is never whether it balances. It is how the funding is split, because the split decides how much of the company belongs to its owners and how much to others who will want their money back.
Assets = Liabilities + Equity
Bharat Cables, 31 March 2025 (Rs crore):
Assets = 546 + 60 + 160 + 200 + 46 = 1,012
Liabilities = 270 + 120 + 134 + 40 = 564
Equity = 448
Liabilities + Equity = 564 + 448 = 1,012- Liabilities here are long-term loans 270, short-term loans 120, trade payables 134 and other dues 40
- Equity = share capital 40 + other equity 408; all figures are illustrative
How is an Indian company's balance sheet laid out?
Indian companies follow Schedule III of the Companies Act, 2013. Companies that follow Ind AS (the accounting standards most listed companies use; Needs verification for a specific company, since some smaller or SME-platform companies follow different rules) use its Division II format. Because the layout is fixed by law, once you can read one company's balance sheet you can read them all.
The main idea in the layout is a split by time. Non-current means it stays with the company for more than a year: a factory, a long-term loan. Current means it turns to cash, or falls due, within the company's normal operating cycle or twelve months, whichever applies: stock, dues from customers, a bill payable to a supplier next month.
Why does the split matter? Because a company can be perfectly sound and still get into trouble if bills fall due before its customers pay. Comparing what is current on both sides is the quickest test of that risk, and the health checks later on this page do exactly that.
Needs verification: the headings in the figure are condensed from the Ind AS format in Schedule III. Check the exact wording against the latest text notified on the Ministry of Corporate Affairs website (mca.gov.in) before quoting a line item.
What are the main assets, in plain words?
Assets are read from the most permanent to the most liquid. Liquid means how quickly and cheaply something can become cash. A factory is not liquid. Money in a current account is.
For each line, ask two questions: what is it, and how could it turn out to be worth less than it is shown?
- Property, plant and equipment (PPE)
- Land, buildings, machinery and vehicles the company uses to earn. Shown at cost less the depreciation charged so far, not at today's market price. Bharat Cables shows ₹546 crore.
- Capital work-in-progress
- A factory or line still being built. It earns nothing yet. A large amount that stays for years without being commissioned deserves a question.
- Goodwill and other intangibles
- Things you cannot touch: software, licences, brands bought in an acquisition, and goodwill, which is the premium paid for a business over the value of its net assets. Goodwill can be written off if the acquisition disappoints.
- Inventories
- Raw material, goods being made and finished goods waiting to be sold. Bharat Cables holds ₹160 crore. Stock that does not sell may have to be sold at a discount.
- Trade receivables
- Money customers owe for goods already delivered. Bharat Cables shows ₹200 crore, after a ₹4 crore provision for one doubtful debt. It is a sale that has not yet become cash.
- Cash and cash equivalents
- Cash in hand, balances in bank accounts and very short-term deposits. Bharat Cables has ₹46 crore.
- Investments, loans and other assets
- Shares and bonds held, deposits paid, loans given, advance tax and prepaid items. Read the note to see who the money was lent to and whether it is likely to come back.
What are the main liabilities, in plain words?
Liabilities are the claims of people outside the owners. Some are a normal part of doing business. Others are a real burden, and it helps to keep the two apart.
A supplier's bill for raw material is ordinary trade credit, the same as a kirana buying on thirty-day credit from the wholesaler. A bank loan is different. It carries interest, has a repayment date, and must be paid whether the year was good or bad.
- Borrowings
- Loans from banks, debentures and other lenders. Long-term borrowings (Bharat Cables: ₹270 crore) are due after a year; short-term borrowings such as working capital loans (₹120 crore) are due within it. Interest on both appears in the income statement as finance cost.
- Trade payables
- What the company owes its suppliers for goods and services already received. Bharat Cables: ₹134 crore. It is free credit, but a company that pays suppliers ever more slowly may be short of cash.
- Lease liabilities
- Under Ind AS 116, the present value of rent the company has agreed to pay for premises or equipment it uses. It works like a loan and is best treated like one.
- Provisions and other dues
- Amounts set aside for expected costs such as gratuity or warranty claims, plus taxes and statutory dues payable. Bharat Cables: ₹40 crore.
- Deferred tax liability
- Tax that the accounts recognise now but that becomes payable later, because tax rules allow some costs to be claimed earlier than the accounts do.
What is equity, and what does book value really mean?
Equity is what belongs to the owners after everything owed to others is paid. It has two parts. Share capital is the face value of shares issued: Bharat Cables has 4 crore shares of ₹10, so ₹40 crore. Other equity, also called reserves and surplus, is mainly profit the company has kept instead of paying out, plus any premium received when shares were sold above face value.
Equity moves for a few plain reasons. It grows when the company earns a profit and keeps it. It falls when the company pays a dividend, buys back shares, or makes a loss. Bharat Cables started FY25 with equity of ₹400 crore, earned ₹60 crore, paid ₹12 crore as dividend (₹3 a share on 4 crore shares) and finished at ₹448 crore.
Dividing equity by the number of shares gives book value per share: ₹448 crore ÷ 4 crore shares = ₹112. This is what each share would be worth if the assets were sold at their balance sheet values and every liability paid off.
The bull view says a business earning well above its book value has something valuable that the balance sheet does not list, such as a brand or a distribution network. The bear view says book value is an accounting number built from old costs, and a share price far above it is a bet on future earnings that may not arrive. Both can be true. Book value is a starting point, not a price.
Book value per share = Shareholders' equity / Number of equity shares
Bharat Cables: 448 / 4 = Rs 112
Equity roll-forward (Rs crore):
Opening equity 400
+ Profit after tax 60
- Dividend paid 12
= Closing equity 448- Use diluted share count if outstanding options or convertibles matter
- Illustrative company; the ₹12 crore dividend is ₹3 a share on 4 crore shares
A worked example: Bharat Cables Ltd, two years side by side
The balance sheet is most useful when you put two dates next to each other, so you can see what changed. This is the same company whose income statement you can read in the topic on reading the income statement, with all figures in ₹ crore.
Everything on the left of the table adds to the same total as everything on the right, on both dates.
| Line (₹ crore) | 31 Mar 2024 | 31 Mar 2025 | Change |
|---|---|---|---|
| Property, plant and equipment | 480 | 546 | +66 |
| Other non-current assets | 60 | 60 | 0 |
| Inventories | 120 | 160 | +40 |
| Trade receivables (net) | 150 | 200 | +50 |
| Cash and cash equivalents | 30 | 46 | +16 |
| Total assets | 840 | 1,012 | +172 |
| Equity (share capital + other equity) | 400 | 448 | +48 |
| Non-current borrowings | 220 | 270 | +50 |
| Current borrowings | 80 | 120 | +40 |
| Trade payables | 100 | 134 | +34 |
| Other current liabilities | 40 | 40 | 0 |
| Total equity and liabilities | 840 | 1,012 | +172 |
Bharat Cables Ltd is an illustrative company. None of these figures belongs to any listed business, and nothing here is a comment on any real company.
What is the story behind the changes?
The change column is where a balance sheet turns from a list into a story. Read each movement and ask what caused it. Every answer below can be checked against the income statement and the cash flow statement of the same year.
- 1
Plant rose by ₹66 crore
The company spent ₹110 crore on new plant (capex) and charged ₹44 crore of depreciation. 480 + 110 − 44 = 546. The business is expanding.
- 2
Stock and customer dues rose faster than sales
Revenue grew 20 per cent, from ₹1,000 crore to ₹1,200 crore. Receivables grew by a third (150 to 200) and inventories by a third (120 to 160). The bull reading is that a growing business needs more stock and offers more credit. The bear reading is that customers are paying more slowly. The balance sheet shows the fact; the working capital topic in this module helps you judge which reading fits.
- 3
Equity rose by ₹48 crore
Profit of ₹60 crore less the ₹12 crore dividend. Nothing was raised from shareholders this year; growth of net worth came from kept profit.
- 4
Borrowings rose by ₹90 crore
Profit alone did not fund the capex and the extra working capital, so lenders filled the gap. Debt rose from 0.75 times equity to 0.87 times.
- 5
Cash rose by ₹16 crore
A small cushion. The cash flow statement, read next, explains exactly how each rupee of this movement arose.
Five quick health checks, and what each can and cannot tell you
A few simple ratios summarise the balance sheet. Each looks at one aspect only, so use them together and compare only with similar companies. For Bharat Cables, current assets are inventories 160, receivables 200 and cash 46, which is ₹406 crore. Current liabilities are current borrowings 120, payables 134 and other dues 40, which is ₹294 crore.
| Check | Bharat Cables FY25 | FY24 | What it can tell you | Where it misleads |
|---|---|---|---|---|
| Current ratio (current assets / current liabilities) | 406 / 294 = 1.38 | 300 / 220 = 1.36 | Whether short-term dues are covered by short-term assets | Slow-moving stock inflates it; a business that collects cash daily can run well on a low one |
| Debt to equity (borrowings / equity) | 390 / 448 = 0.87 | 300 / 400 = 0.75 | How much of the funding comes from lenders rather than owners | Ignores lease liabilities and guarantees; a fixed number tells you nothing without the interest cover |
| Receivable days (receivables / revenue x 365) | 200 / 1,200 x 365 = 61 days | 150 / 1,000 x 365 = 55 days | How long customers take to pay, and whether that is stretching | A single year-end figure can be distorted by seasonality or a large invoice at March end |
| Inventory days (inventory / cost of goods x 365) | 160 / 780 x 365 = 75 days | Needs the FY24 cost of goods, which is not shown here | How long stock sits before it sells | Stocking ahead of a season or a price rise looks the same as unsold stock |
| Book value per share (equity / shares) | 448 / 4 = ₹112 | 400 / 4 = ₹100 | The accounting net worth behind each share | Assets at old cost; brands and people are missing |
There is no single good number for any of these. The useful test is direction over five years and comparison with companies in the same business, because a distributor, a cement plant and a software firm have completely different balance sheets.
What is hiding behind the face of the balance sheet?
The statement itself is a summary. The notes to accounts that follow it carry the detail, and this is where a careful reader spends a few minutes.
Schedule III asks companies to show an ageing of trade receivables and trade payables, and of capital work-in-progress, so you can see how much is overdue and for how long. It also requires a set of financial ratios to be disclosed with explanations for large changes. Read those pages before you draw a conclusion.
Some obligations never appear on the face at all. Contingent liabilities, such as a disputed tax demand or a guarantee given for a group company, are described in the notes because they may become real liabilities only if something goes wrong. Ignoring them makes a balance sheet look safer than it is. Treating every one of them as certain makes it look worse than it is. The honest approach is to read the note, judge how likely each one is, and size it against equity.
Finally, choose consolidated over standalone when a company has subsidiaries, for the same reason as with the income statement: consolidated is the version that describes the whole group whose shares you would own.
What does the balance sheet NOT tell you?
It is a strong statement, and easy to over-trust. Four limits are worth keeping in mind.
It is a single day. A company can tidy up its position just before 31 March, for example by collecting dues early or delaying payments, so the picture on that day may not be its usual state. Compare it with the quarterly balance sheets and with earlier years.
It shows old costs, not market values. Land bought decades ago may be worth many times its book value. A machine may be worth less than its book value if technology has moved on. Neither difference appears until the asset is sold or written down.
It leaves out much of what makes a business valuable. A strong brand, a loyal customer base, a good team and a low-cost process are worth a lot and are mostly missing, unless they were bought in an acquisition.
It says nothing about earnings or cash. A strong-looking balance sheet can belong to a business that is losing customers, and a weak-looking one to a business that is growing fast. Always read it with the income statement and cash flow statement.
When this goes wrong: buying into a low price-to-book ratio because the balance sheet looks cheap, without asking why. If the assets earn poorly, or are worth less than they are shown at, the discount may be fair. Balance sheet strength is one input, not a verdict.
How do you read a balance sheet in ten minutes?
Read the balance sheet in the same order every time, and keep the income statement and cash flow statement open beside it. Start with how the company is funded, then move to what it owns, and end with what could go wrong.
Run this on the next balance sheet you open
- Is it consolidated, and are you comparing two dates of the same kind?
- How much of the funding is equity and how much is borrowings? Note the debt to equity ratio and how it changed.
- Are short-term dues (current liabilities) covered by short-term assets? Check the current ratio and the mix inside current assets.
- Have receivables and inventory grown faster than revenue? Check the days figures for both.
- How much of the asset base is capital work-in-progress or goodwill, and how long has it been there?
- Read the receivables ageing and the note on contingent liabilities.
- Roll equity forward: opening plus profit less dividends and buybacks. Does it match the closing figure?
- Compare closing cash with the cash flow statement. They must agree.
Key points
- A balance sheet is a photograph of one day: what the company owns, what it owes and what is left for its owners.
- Assets = liabilities + equity. It always balances because every asset was paid for by owners, lenders or suppliers.
- Schedule III splits both sides into non-current (more than a year) and current (within a year or the operating cycle).
- Equity is owners' money: share capital plus reserves. Book value per share is equity divided by shares, an accounting figure and not a price.
- Read the change between two dates and ask what caused each movement; that turns a list into a story.
- Current ratio, debt to equity, receivable days and inventory days each show one side of health and each can mislead alone.
- The notes to accounts carry the ageing tables and contingent liabilities that the face of the statement leaves out.
- It does not show earnings, cash generation, market value or intangible strengths, so read it with the other two statements.
Assets = Liabilities + Equity | Current ratio = Current assets / Current liabilities | Debt to equity = Borrowings / Equity | Book value per share = Equity / Shares
Bharat Cables Ltd (illustrative, not a real company), 31 March 2025, ₹ crore: assets of 1,012 (plant 546, inventories 160, receivables 200, cash 46, other 60) are funded by equity 448, borrowings 390, payables 134 and other dues 40. Current ratio is 406 / 294 = 1.38, debt to equity is 390 / 448 = 0.87 and book value per share is ₹112 on 4 crore shares.
Put two balance sheets side by side and compute the change for every line before you compute a single ratio. The story of the year sits in the change column: which lines grew faster than sales, and who funded the growth.
Book value is the cost of assets less depreciation, not what they would fetch. Do not read a price below book value as a bargain, or a price above it as expensive, without asking what the assets actually earn and what they are really worth.
Frequently asked questions
What is a balance sheet in simple words?
It is a statement of what a company owns, what it owes and what is left for its owners on a particular date. It is like a household's list of savings, property and loans, ending with net worth. Indian companies present it in the format prescribed in Schedule III of the Companies Act, 2013.
Assets vs liabilities: what is the difference?
Assets are what the company owns or is owed, such as plant, stock, cash and dues from customers. Liabilities are what it owes to others, such as bank loans and supplier bills. The difference between the two is equity, the owners' share. A liability is not automatically bad: supplier credit is normal, while heavy borrowing carries a fixed interest burden.
What is the difference between current and non-current items?
Current items are expected to turn into cash, or to fall due for payment, within the company's normal operating cycle or twelve months. Non-current items last longer, such as a factory or a five-year loan. Comparing current assets with current liabilities shows whether short-term bills can be met from short-term resources.
How do you calculate book value per share?
Divide shareholders' equity by the number of equity shares. In the illustrative example on this page, equity of ₹448 crore divided by 4 crore shares gives ₹112 a share. Use the latest balance sheet and the share count on the same date, and remember that this is an accounting figure, not a fair price for the share.
What is a good current ratio?
No single number is right for every company, and any figure quoted without a sector is not meaningful. A business that collects cash daily can operate safely on a low ratio, while a company with slow-selling stock needs a higher one. Compare the ratio with the same company's past years and with similar businesses, and check what the current assets consist of.
Balance sheet vs income statement: which one matters more?
They answer different questions, so both matter. The income statement covers a period and shows whether the company earned a profit. The balance sheet covers one date and shows what it owns, owes and is funded by. A profitable company with weak funding can struggle, and a strong balance sheet with falling profits is losing strength, so they are read together.
Why does a balance sheet always balance?
Because every asset was paid for by someone: the owners, lenders or those the company has yet to pay. Total assets therefore equal total liabilities plus equity by construction. If the two sides do not match, the statement has an error, which is why audited statements are checked to agree.
Written By
Rohit Singh
Mr. Chartist
With 14+ years of experience in Indian financial markets, Rohit Singh (Mr. Chartist) is a SEBI Registered Research Analyst, Amazon #1 bestselling author, and the founder of Investology — a premium trading ecosystem trusted by a 1.5 Lakh+ strong community across India.