How to Read a Balance Sheet?
Understand how to analyze a company's balance sheet.
📋 How to Read a Balance Sheet
The Financial X-Ray of a Company
If a company were a human body, the Balance Sheet would be its X-ray — revealing the bone structure, the fat, the muscle, and any hidden fractures that the surface doesn’t show. Every investor who buys a stock is essentially buying a piece of a business. And to understand what you’re buying, you must learn to read its Balance Sheet.
The good news? Once you understand the logic, a Balance Sheet tells you an extraordinary amount about a company’s financial health, strength, and sustainability — in a single snapshot.
🤔 What is a Balance Sheet?
Definition
A Balance Sheet (also called a Statement of Financial Position) is a financial statement that shows:
- What a company OWNS (Assets)
- What a company OWES (Liabilities)
- What belongs to shareholders (Equity / Net Worth)
At any given date, these three must always be in balance:
╔═══════════════════════════════════════════════════════╗
║ ║
║ ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY ║
║ ║
║ What you OWN = What you OWE + What belongs to YOU ║
║ ║
╚═══════════════════════════════════════════════════════╝This is called the Accounting Equation — the fundamental identity of all accounting. It always holds true. If it doesn’t, there’s an error somewhere.
A Simple Analogy
Think of your personal finances:
YOUR ASSETS:
- House: ₹60 lakh
- Car: ₹8 lakh
- Bank savings: ₹5 lakh
- Investments: ₹7 lakh
Total Assets = ₹80 lakh
YOUR LIABILITIES:
- Home loan: ₹35 lakh
- Car loan: ₹3 lakh
Total Liabilities = ₹38 lakh
YOUR NET WORTH (Equity):
₹80 lakh - ₹38 lakh = ₹42 lakhA company’s Balance Sheet works exactly the same way — just at a much larger scale.
📅 When is a Balance Sheet Prepared?
- Annually: As of March 31st (end of Indian financial year)
- Quarterly: For listed companies — interim balance sheets every quarter
- On specific dates: For special purposes (merger, IPO, etc.)
Important: A Balance Sheet is a snapshot in time — not a period (unlike the Profit & Loss statement which covers a period). It shows the company’s position on one specific date.
🏗️ Structure of an Indian Balance Sheet
The Indian Format (Schedule III, Companies Act 2013)
Indian companies follow a vertical format as mandated by the Companies Act:
┌─────────────────────────────────────────────────────┐
│ BALANCE SHEET OF XYZ LTD │
│ As at March 31, 20XX │
├─────────────────────────────────────────────────────┤
│ EQUITY AND LIABILITIES ₹ Crore │
│ │
│ I. SHAREHOLDERS' EQUITY │
│ Share Capital XXX │
│ Other Equity (Reserves) XXX │
│ Total Equity XXX │
│ │
│ II. NON-CURRENT LIABILITIES │
│ Long-term Borrowings XXX │
│ Deferred Tax Liabilities XXX │
│ Other LT Liabilities XXX │
│ Total Non-Current Liab. XXX │
│ │
│ III.CURRENT LIABILITIES │
│ Short-term Borrowings XXX │
│ Trade Payables XXX │
│ Other Current Liabilities XXX │
│ Total Current Liab. XXX │
│ │
│ TOTAL EQUITY AND LIABILITIES XXX │
├─────────────────────────────────────────────────────┤
│ ASSETS ₹ Crore │
│ │
│ I. NON-CURRENT ASSETS │
│ Property, Plant & Equipment XXX │
│ Intangible Assets XXX │
│ Long-term Investments XXX │
│ Deferred Tax Assets XXX │
│ Total Non-Current Assets XXX │
│ │
│ II. CURRENT ASSETS │
│ Inventories XXX │
│ Trade Receivables XXX │
│ Cash & Cash Equivalents XXX │
│ Other Current Assets XXX │
│ Total Current Assets XXX │
│ │
│ TOTAL ASSETS XXX │
└─────────────────────────────────────────────────────┘TOTAL ASSETS must always equal TOTAL EQUITY + LIABILITIES
🏛️ PART 1: EQUITY (Shareholders’ Funds)
What is Equity?
Equity is what belongs to the owners (shareholders) after all debts are paid. It’s also called:
- Shareholders’ Equity
- Net Worth
- Book Value
- Shareholders’ Funds
Equity = Total Assets - Total LiabilitiesComponents of Equity
1. 💰 Share Capital
What it is: The money raised by issuing shares to the public and other shareholders.
Share Capital = Face Value × Number of Shares IssuedExample:
- Face value: ₹2 per share
- Shares issued: 100 crore
- Share Capital = ₹200 crore
Two types:
Authorised Capital:
- Maximum capital the company is allowed to issue (per its Memorandum of Association)
- Just a ceiling — doesn’t mean all is issued
Paid-up Capital:
- Actually issued and fully paid for by shareholders
- This is what appears on the Balance Sheet
- Always ≤ Authorised Capital
What to note:
- Share capital changes only when new shares are issued (IPO, FPO, Rights Issue, ESOP)
- Bonus shares and splits don’t increase total share capital value — just redistribute face value
2. 📦 Other Equity (Reserves & Surplus)
This is the accumulated profit of the company over its lifetime — money retained in the business rather than distributed as dividends.
Key components:
Securities Premium Reserve:
- When shares are issued above face value, the excess goes here
- Example: Face value ₹2, IPO at ₹200 → ₹198 per share goes to Securities Premium
- Largest component for most companies
General Reserve:
- Retained profits transferred here for general business use
- Represents management’s conservative approach to retaining earnings
Retained Earnings / Profit & Loss Balance:
- Cumulative net profits minus dividends paid over the company’s lifetime
- The most dynamic component — changes every year
- Positive = profitable history
- Negative (accumulated losses) = company has been loss-making
Capital Reserve:
- Profits of capital nature (asset sales, subsidies, etc.)
- Cannot be distributed as dividends
Revaluation Reserve:
- When assets are revalued upward
- Not cash — just accounting adjustment
Other Comprehensive Income (OCI):
- Unrealised gains/losses on investments, currency, etc.
- Flows directly to equity, bypassing P&L
Quick Health Check on Equity
Growing Other Equity year-on-year = ✅ Company retaining profits, wealth being built
Shrinking Other Equity = ⚠️ Losses eroding shareholder wealth
Negative Equity (Liabilities > Assets) = 🚨 Company technically insolvent💳 PART 2: LIABILITIES
Non-Current Liabilities
Obligations due after one year — long-term commitments.
1. 🏦 Long-term Borrowings
The most critical liability line.
Money borrowed for more than one year — the company’s long-term debt.
Types:
- Term loans from banks (SBI, HDFC Bank, etc.)
- Non-Convertible Debentures (NCDs) — bonds issued to public
- External Commercial Borrowings (ECB) — foreign currency loans
- Lease liabilities (post Ind AS 116)
What to analyse:
Debt-to-Equity Ratio = Total Long-term Debt / Total Equity
< 0.5x = Conservative, low risk
0.5-1x = Moderate, acceptable for most industries
1-2x = High, monitor carefully
> 2x = Aggressive, risky (unless utility/infra company)Interest Coverage Ratio:
= EBIT (Earnings Before Interest & Tax) / Interest Expense
> 5x = Comfortable — can easily service debt
3-5x = Adequate
< 3x = Concerning — debt burden is heavy
< 1x = Danger — can't pay interest from operations!2. 🔮 Deferred Tax Liabilities (DTL)
What it is: The difference between tax as per accounting books vs tax as per Income Tax Act — where company has paid less tax now but will pay more later.
Why it exists:
- Accounting depreciation ≠ Tax depreciation
- Timing differences create temporary tax gaps
For investors: Usually not a major concern unless abnormally large. It will eventually be paid.
3. 📜 Long-term Provisions
What it is: Money set aside for long-term obligations:
- Employee gratuity and pension liabilities
- Warranty provisions (for product companies)
- Decommissioning costs
What to check: Are provisions adequate? Under-provisioning inflates profits.
Current Liabilities
Obligations due within one year — short-term obligations.
4. ⚡ Short-term Borrowings
Working capital loans, overdraft facilities, commercial paper — short-term debt.
Red flag: If short-term borrowings keep growing → company may be funding operations through debt → cash flow problem.
5. 🤝 Trade Payables (Creditors)
Money owed to suppliers for goods and services already received but not yet paid.
Days Payable Outstanding (DPO) = (Trade Payables / Cost of Goods Sold) × 365
High DPO = Company delaying payments to suppliers (good for working capital but watch for strain)
Low DPO = Company paying quickly (may indicate supplier pressure or cash richness)Context matters:
- Large companies (Reliance, Infosys) have high DPO — suppliers accept delayed payment for the business
- Small companies have low DPO — suppliers demand faster payment
6. 📋 Other Current Liabilities
- Advance from customers: Money received before delivering goods/services → a liability until fulfilled
- Employee dues: Salaries payable, PF, ESI
- Tax liabilities: TDS payable, GST, advance tax
- Accrued expenses: Services received but bills not yet received
7. 🔔 Short-term Provisions
- Proposed dividends (if declared but not paid)
- Warranty provisions for the current year
- Bonus payable to employees
🏢 PART 3: ASSETS
Non-Current Assets
Assets that will be used for more than one year — the long-term backbone of the business.
1. 🏭 Property, Plant & Equipment (PP&E / Fixed Assets)
The physical backbone of the business.
Tangible long-term assets used in operations:
- Land and buildings
- Plant and machinery
- Vehicles and equipment
- Computers and IT hardware
- Furniture and fixtures
Key concept: Depreciation
PP&E is shown at:
Gross Block (original cost)
LESS: Accumulated Depreciation
= Net Block (book value on Balance Sheet)Example:
Gross Block (original cost of factory) : ₹500 crore
Less: Accumulated Depreciation : ₹200 crore
Net Block (current book value) : ₹300 croreWhat to analyse:
Asset Turnover Ratio = Revenue / Total Assets
Higher = Company generating more revenue per rupee of assets
(asset-light, efficient business)
Lower = Asset-heavy business or under-utilised capacityCapital Expenditure (Capex):
Capex = Current year Gross Block - Previous year Gross Block + Disposals
Rising Capex = Company investing in growth (positive for future)
Zero Capex = Milking assets, not investing (positive for cash flow, concerning for future)2. 💡 Intangible Assets
Assets you can’t touch but are immensely valuable.
- Goodwill: Premium paid over book value in acquisitions
- Brands and trademarks: Legally owned brand names
- Patents and copyrights: Intellectual property
- Software and licenses: Technology assets
- Customer relationships: Valued in acquisitions
The Goodwill Problem:
When Company A buys Company B for ₹500 crore
But B's net assets = ₹300 crore
Goodwill = ₹500 - ₹300 = ₹200 crore
This ₹200 crore sits on A's Balance Sheet
If the acquisition doesn't work out → Goodwill Impairment
→ ₹200 crore written off → Big P&L hitRed flag: Very high goodwill relative to total assets = risky acquisitions.
3. 📈 Non-Current Investments
Long-term financial investments:
- Shares in subsidiaries and associates
- Long-term mutual fund investments
- Strategic equity stakes
- Bonds and debentures held to maturity
What to check:
- Are investments in subsidiaries or unrelated businesses?
- Are they marked to market (fair value) or at cost?
- Any significant unrealised losses?
4. 📅 Capital Work-in-Progress (CWIP)
Assets under construction — not yet ready for use.
A factory being built, a power plant being commissioned — these live here until complete, then transfer to PP&E.
What to check:
- CWIP that’s been stuck for years → project delays, cost overruns
- Large CWIP → future capacity coming online (growth signal)
5. 🔄 Deferred Tax Assets (DTA)
The flip side of DTL — when company has paid more tax than accounting profit warrants, it gets a “tax credit” for the future.
Common when a company has:
- Accumulated losses (tax benefit to be utilised in future)
- Provisions not yet deductible for tax
Current Assets
Assets that will be converted to cash within one year — the lifeblood of day-to-day operations.
6. 📦 Inventories (Stock)
Goods held for sale or used in production.
Three types:
Raw Materials → Inputs not yet processed
Work-in-Progress → Partially manufactured goods
Finished Goods → Ready for saleKey metric:
Inventory Turnover = Cost of Goods Sold / Average Inventory
High turnover = Moving stock quickly = Efficient operations
Low turnover = Slow-moving inventory = Risk of obsolescence
Days Inventory Outstanding (DIO) = 365 / Inventory Turnover
Lower DIO = BetterRed flags in inventory:
- Inventory growing faster than revenue → Unsold goods piling up
- Sudden inventory write-offs → Was previously overstated
- For IT/software companies: Very low inventory (asset-light = good)
7. 📬 Trade Receivables (Debtors)
Money owed by customers for goods/services already delivered but not yet collected.
Days Sales Outstanding (DSO) = (Trade Receivables / Revenue) × 365
Lower DSO = Customers paying quickly = Healthy
Higher DSO = Customers delaying payment = Cash flow riskThis is one of the most important items to watch:
⚠️ RED FLAGS IN RECEIVABLES:
1. Receivables growing much faster than revenue
→ Either fake sales or inability to collect
2. Receivables suddenly written off
→ Were they real in the first place?
3. High concentration in few customers
→ Business risk if they don't pay
4. Related party receivables
→ Could be circular transactionsFamous fraud indicator: In Satyam’s fraud, inflated cash and receivables were key signals that something was wrong.
8. 💵 Cash and Cash Equivalents
The king of current assets — actual money.
- Cash in hand
- Bank balances (current and savings accounts)
- Fixed deposits with maturity < 3 months
- Highly liquid short-term investments (liquid mutual funds, T-bills)
What to analyse:
Cash-Rich Company (High Cash):
+ Financial strength, can weather downturns
+ Can fund growth without borrowing
+ Potential for dividends/buybacks
- Too much idle cash = poor capital allocation
- "Cash trap" if promoters aren't returning it to shareholders
Cash-Poor Company (Low Cash):
- Vulnerable to downturns
- May need to borrow at bad times
- Risk of liquidity crunchThe Cash Paradox:
High profit + Low cash = Warning sign (where is the cash going?)
Verify cash is real:
Cash Flow from Operations should roughly match Net Profit
(Adjusting for non-cash items like depreciation)
If company shows ₹1,000 crore profit but only ₹100 crore
operating cash flow for 5 years straight → Investigate!9. 📑 Other Current Assets
- Loans and advances (short-term): Money lent to others, advances paid
- Prepaid expenses: Expenses paid in advance
- GST input credit: Tax credit available
- Short-term investments: Mutual funds, FDs > 3 months but < 1 year
🔗 PART 4: THE WORKING CAPITAL CONCEPT
What is Working Capital?
Working Capital = Current Assets - Current LiabilitiesIt represents the capital needed to run day-to-day operations.
Positive Working Capital (Good Usually)
Current Assets > Current Liabilities
Company can meet short-term obligations
from short-term assets
→ Financially stable in short termNegative Working Capital (Context Dependent)
Current Assets < Current Liabilities
Usually concerning — but not always!
Exception: Retailers and FMCG companies often have
negative working capital — they collect cash from
customers before paying suppliers (like D-Mart!)
Negative working capital in these cases = GREAT business modelWorking Capital Cycle
Cash → Raw Materials → Work-in-Progress → Finished Goods
↓
Cash ← Collections from Customers ← Sales (Debtors)Cash Conversion Cycle (CCC):
CCC = DIO + DSO - DPO
DIO = Days Inventory Outstanding (how long inventory sits)
DSO = Days Sales Outstanding (how long receivables take to collect)
DPO = Days Payable Outstanding (how long you take to pay suppliers)
Lower CCC = Better (less cash tied up in operations)
Negative CCC = Excellent (suppliers finance your operations!)D-Mart (Avenue Supermarts):
- Very low DIO (fast inventory turns)
- Very low DSO (cash sales — customers pay immediately)
- High DPO (pays suppliers in 30+ days)
- Negative CCC = Suppliers fund the business! Amazing model.
📐 PART 5: KEY RATIOS FROM THE BALANCE SHEET
Liquidity Ratios (Can the company pay short-term bills?)
1. Current Ratio
Current Ratio = Current Assets / Current Liabilities
> 2x = Very comfortable
1-2x = Adequate
< 1x = Potentially stressed (but check business model first)2. Quick Ratio (Acid Test)
Excludes inventory (least liquid current asset):
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
> 1x = Can meet immediate obligations without selling inventory
< 1x = May struggle to meet obligations quickly3. Cash Ratio
Most conservative test — only cash:
Cash Ratio = Cash & Equivalents / Current Liabilities
> 0.5x = Good cash buffer
< 0.2x = Very low cash cushionSolvency Ratios (Can the company survive long term?)
4. Debt-to-Equity (D/E) Ratio
D/E Ratio = Total Debt / Total Equity
< 0.5x = Conservative
0.5-1x = Moderate
1-2x = Leveraged
> 2x = Highly leveraged (risky for most sectors)Sector context matters:
- Utilities, infrastructure: High D/E acceptable (stable cash flows)
- IT, FMCG: Should have very low D/E
- Banks: D/E not meaningful (their business IS borrowing and lending)
5. Debt-to-Assets Ratio
Debt-to-Assets = Total Debt / Total Assets
Shows what % of assets are financed by debt
Lower = Better6. Interest Coverage Ratio
Interest Coverage = EBIT / Interest Expense
(From P&L, but directly linked to Balance Sheet debt)
> 5x = Very comfortable
3-5x = Adequate
< 3x = Risky
< 1x = Cannot service debt from operations — DANGEREfficiency Ratios (How well is the company using assets?)
7. Asset Turnover Ratio
Asset Turnover = Revenue / Total Assets
Higher = More efficient use of assets
IT companies: 1.5-3x (asset-light)
Manufacturing: 0.5-1.5x (asset-heavy)8. Return on Assets (ROA)
ROA = Net Profit / Total Assets × 100
Higher = More profit per rupee of assets
> 15% = Excellent
10-15% = Good
5-10% = Moderate
< 5% = Poor asset utilisation9. Return on Equity (ROE)
ROE = Net Profit / Shareholders' Equity × 100
The most important profitability metric for shareholders!
> 20% = Excellent
15-20% = Good
10-15% = Average
< 10% = PoorWhy ROE > ROA (usually): Leverage amplifies returns. A company using debt can earn higher ROE than ROA — but also takes more risk.
10. Return on Capital Employed (ROCE)
ROCE = EBIT / Capital Employed × 100
Capital Employed = Total Assets - Current Liabilities
= Equity + Long-term Debt
ROCE > Cost of Capital = Value creation
ROCE < Cost of Capital = Value destructionThe DuPont Analysis: Decomposing ROE
ROE can be broken into three components:
ROE = Net Profit Margin × Asset Turnover × Financial Leverage
Net Profit Revenue Total Assets
= ─────────── × ────────── × ────────────
Revenue Total Assets Equity
Example:
Net Margin = 15%
Asset Turnover = 1.2x
Financial Leverage = 2x
ROE = 15% × 1.2 × 2 = 36%Why DuPont is powerful:
Two companies can have the same ROE but through completely different means:
| Company | Net Margin | Asset Turnover | Leverage | ROE |
|---|---|---|---|---|
| HUL (FMCG) | 18% | 2.0x | 1.5x | 54% |
| Tata Steel | 5% | 1.0x | 3.0x | 15% |
HUL achieves high ROE through high margins and efficiency. Tata Steel uses leverage — riskier.
📊 PART 6: READING A REAL BALANCE SHEET
Step-by-Step Analysis Framework
Step 1: Look at the Big Picture
First 60 seconds:
- How big is the company? (Total assets)
- What’s the equity vs debt split?
- Is equity growing year-on-year?
- Any obviously alarming numbers?
Step 2: Assess the Equity Quality
Check:
✅ Is equity positive and growing?
✅ Is retained earnings the largest component? (Profitable history)
✅ Is share capital stable? (No excessive dilution)
✅ Any large revaluation reserves? (Check if real)Step 3: Examine the Debt
Check:
✅ What is total debt (short-term + long-term)?
✅ Calculate D/E ratio
✅ Has debt been rising or falling?
✅ What is the interest coverage ratio?
✅ Is debt being used for capex (growth) or operations (concerning)?
✅ Any debt due for repayment soon?Step 4: Analyse Current Assets vs Liabilities
Check:
✅ Current ratio (> 1 generally preferred)
✅ Cash position — how many months of expenses?
✅ Receivables growth vs revenue growth
✅ Inventory levels vs cost of goods sold
✅ Any large advances or loans given?Step 5: Scrutinise the Assets
Check:
✅ What are the main assets?
✅ Capex trend — investing for growth or not?
✅ CWIP — projects on track?
✅ Goodwill — any impairment risk?
✅ Investments — related or unrelated to core business?Step 6: Year-on-Year Comparison
Always compare at least 3-5 years:
The Trend is Your Friend:
→ Growing equity + Shrinking debt = Strengthening balance sheet ✅
→ Shrinking equity + Growing debt = Weakening balance sheet ⚠️
→ Cash conversion improving = Better business quality ✅
→ Receivables building up = Revenue quality concern ⚠️🔍 Illustrative Example: Reading a Simplified Balance Sheet
Company: Healthy Foods Ltd (Illustrative)
BALANCE SHEET as at March 31, 20XX
(₹ crore)
FY20XX FY20XX-1
EQUITY & LIABILITIES
Share Capital 50 50
Reserves & Surplus 1,200 1,000
TOTAL EQUITY 1,250 1,050 ↑ Good
Long-term Borrowings 300 400 ↑ Reducing! Great
Deferred Tax Liabilities 40 35
TOTAL NON-CURRENT LIAB. 340 435
Short-term Borrowings 100 150 ↑ Reducing
Trade Payables 200 180
Other Current Liabilities 80 70
TOTAL CURRENT LIABILITIES 380 400
TOTAL EQUITY & LIABILITIES 1,970 1,885
ASSETS
PP&E (Net Block) 700 680 ↑ Small capex
CWIP 50 120 ↓ Project completed
Intangible Assets 30 30
Non-current Investments 100 80
TOTAL NON-CURRENT ASSETS 880 910
Inventories 180 200 ↓ Better efficiency
Trade Receivables 300 250 ↑ Watch this
Cash & Equivalents 450 350 ↑ Cash growing! ✅
Other Current Assets 160 175
TOTAL CURRENT ASSETS 1,090 975
TOTAL ASSETS 1,970 1,885Reading the Story
Positive signals:
- ✅ Equity grew from ₹1,050 → ₹1,250 crore (company is profitable)
- ✅ Long-term debt falling (₹400 → ₹300 crore) — deleveraging
- ✅ Short-term debt falling — working capital improving
- ✅ CWIP reduced (project completed, now generating revenue)
- ✅ Inventory reduced (better inventory management)
- ✅ Cash grew significantly (₹350 → ₹450 crore)
Watchpoint:
- ⚠️ Trade receivables grew ₹250 → ₹300 crore while revenue grew (check DSO)
- Monitor whether receivables growth is justified or concerning
Quick Ratios:
Current Ratio = ₹1,090 / ₹380 = 2.87x ✅ Excellent
D/E Ratio = ₹400 / ₹1,250 = 0.32x ✅ Conservative
Equity Growth = (1,250-1,050)/1,050 = 19% ✅ StrongOverall: This looks like a financially healthy, strengthening company.
🚨 Red Flags in a Balance Sheet
The Danger Signs
🚩 Equity eroding year after year → Persistent losses eating into net worth
🚩 Debt growing faster than assets → Leveraging up dangerously
🚩 Receivables growing much faster than revenue → Fake sales or collection issues
🚩 Cash declining while profits reported → Where is the cash going?
🚩 Very high goodwill → Risky acquisitions, impairment risk
🚩 Loans and advances to related parties → Money being siphoned out
🚩 Short-term borrowings funding long-term assets → Asset-liability mismatch
🚩 Negative equity (liabilities > assets) → Technically insolvent
🚩 Inventory write-offs → Were previously inflated
🚩 CWIP stuck for years → Project delays, cost overruns
🚩 Contingent liabilities footnote ballooning → Hidden risks
⚠️ The Footnotes: Where the Truth Hides
Never ignore the Notes to Accounts!
The footnotes contain crucial information:
1. Contingent Liabilities
- Lawsuits pending against the company
- Tax disputes
- Guarantee given on behalf of subsidiaries
- These are not on the Balance Sheet but could become real liabilities
Always check:
"What is the total contingent liability?"
"What is the probability of materialisation?"
If large contingent liabilities exist → adjust your analysis2. Related Party Transactions Detail
- Who are the related parties?
- What was the nature and value of transactions?
- Were they at arm’s length?
3. Debt Schedule
- Maturity profile of debt (when is it due?)
- Interest rates
- Security (what is pledged?)
- Covenants (restrictions on company’s actions)
4. Segment Information
- How does each business segment contribute?
- Capital employed per segment
- Profitability per segment
5. Accounting Policies
- How does the company recognise revenue?
- What depreciation method?
- How are inventories valued?
- Any policy changes from previous year?
Important: A change in accounting policy can make results look better without any real improvement!
🏦 Special Case: Reading a Bank’s Balance Sheet
Banks are different from regular companies — their Balance Sheet structure is unique.
Bank Balance Sheet Structure
ASSETS (Uses of Funds):
Advances (Loans given) → Core earning asset
Investments (Bonds, securities) → Returns on excess capital
Cash and Balances with RBI → Regulatory requirement (CRR)
Fixed Assets → Small (branches, equipment)
LIABILITIES (Sources of Funds):
Deposits (Savings, Current, FD) → Core funding — money from customers
Borrowings (from RBI, markets) → Additional funding
Capital & Reserves → Equity — cushion against lossesKey Bank-Specific Metrics
Capital Adequacy Ratio (CAR / CRAR):
CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets
RBI Minimum: 11.5% (including buffers)
Good banks: 15-18%+
Higher = More capital cushion = SaferNet NPA Ratio:
Net NPA = Gross NPAs - Provisions
Net NPA % = Net NPA / Net Advances × 100
< 0.5% = Excellent (HDFC Bank typically here)
0.5-1% = Good
1-3% = Watch
> 3% = Concerning
> 5% = Serious troubleProvision Coverage Ratio (PCR):
PCR = Provisions Made / Gross NPAs × 100
Higher = Better (more conservative provisioning)
> 70% = Conservative, safer
< 50% = Aggressive, riskyCASA Ratio:
CASA = Current Account + Savings Account deposits / Total Deposits
Higher CASA = Cheaper funding (current and savings deposits are low-interest)
> 45% = Excellent
30-45% = Good
< 30% = Expensive funding baseLoan-to-Deposit Ratio (LDR / CDR):
LDR = Total Loans / Total Deposits
60-80% = Comfortable
> 90% = Aggressive lending, liquidity risk🆚 Comparing Balance Sheets Across Companies
Normalisation for Fair Comparison
When comparing two companies, normalise for size:
Instead of comparing absolute ₹ amounts:
Compare RATIOS that are size-independent
D/E ratio, Current ratio, ROE, ROA, ROCE
Asset turnover, Working capital ratiosPeer Comparison Example: HDFC Bank vs ICICI Bank
| Metric | HDFC Bank | ICICI Bank | Better |
|---|---|---|---|
| Net NPA % | ~0.3% | ~0.4% | HDFC Bank |
| CASA Ratio | ~44% | ~43% | Roughly Equal |
| CAR | ~18% | ~16% | HDFC Bank |
| ROE | ~17% | ~18% | ICICI Bank |
| Net Interest Margin | ~4% | ~4.7% | ICICI Bank |
Numbers are illustrative — check current values
📚 Where to Find Balance Sheets in India
Free Sources
1. BSE/NSE Websites (Official)
- NSE: nseindia.com → Company → Financial Results
- BSE: bseindia.com → Financials → Annual Report
- Quarterly and annual filings available
2. Screener.in (Most Useful)
- 10-year historical Balance Sheet data
- Year-on-year comparison
- Automatic ratio calculations
- Free for basic use
- Export to Excel
3. Annual Report (Most Complete)
- Available on company’s investor relations website
- Contains notes, disclosures, segment data
- Audited and most reliable
4. Moneycontrol / Economic Times
- Balance Sheet with trend data
- Mobile-friendly interface
- Analyst commentary
5. Trendlyne / Tickertape
- Visual Balance Sheet analysis
- Automatic flags for abnormalities
- Comparison tools
6. Broker Research Platforms
- Zerodha Kite, Groww — basic balance sheet
- More detailed on full-service broker platforms
🎓 The Balance Sheet Tells a Story
Translating Numbers into Narrative
A strong Balance Sheet story looks like:
"This company has been consistently profitable (growing equity).
It has been reducing debt (deleveraging), improving its financial
strength. It generates strong cash flow (cash growing). Its
working capital is efficient (improving DSO, DIO). It has been
investing in capacity (capex), setting up for future growth.
No related party concerns, clean audit — management aligned
with shareholders."A weak Balance Sheet story looks like:
"Equity is eroding as losses mount. Debt keeps growing —
both long-term and short-term. Cash is thin. Receivables keep
building up, suggesting collection problems or inflated revenue.
Promoters have been giving large loans to group companies.
Auditor has qualified the accounts. This company is financially
fragile — a downturn could be existential."The numbers change. But the story pattern repeats across industries and across decades.
🌟 Key Takeaways
✨ Balance Sheet = Snapshot of what a company owns, owes, and is worth on a specific date
✨ Assets = Liabilities + Equity — this equation ALWAYS holds
✨ Equity growth year-on-year is the most basic sign of a profitable, wealth-creating business
✨ Debt must be contextualised — industry, interest coverage, and trend all matter
✨ Cash is king — verify that reported profits translate into actual cash flow
✨ Receivables are the #1 manipulation target — watch their growth vs revenue
✨ Working capital efficiency separates great businesses from average ones
✨ Banks need special treatment — NPA, CASA, CAR replace standard ratios
✨ Footnotes contain the real story — contingent liabilities, related parties, pledges
✨ Always compare multiple years — trends reveal what single-year snapshots hide
🎯 Action Steps
- Go to Screener.in and pull up the Balance Sheet of any company you own
- Calculate D/E, Current Ratio, and ROE for that company
- Compare 5 years of equity — is it growing consistently?
- Check receivables vs revenue growth over 5 years — is it in line?
- Find the cash figure and compare with net profit — do they match reasonably?
- Read the Notes to Accounts for contingent liabilities
- Download the annual report and read the Chairman’s letter alongside the Balance Sheet
“Accounting is the language of business.”
— Warren Buffett
“The Balance Sheet is more important than the P&L. It tells you about the company’s financial health, while P&L tells you about its performance. You can fake performance, but the Balance Sheet accumulates truth over time.”
— Common wisdom among value investors
“In investing, what is comfortable is rarely profitable.”
— Robert Arnott (Reading Balance Sheets is uncomfortable work — that’s why it pays)
📋 The Balance Sheet doesn’t lie. People lie. The Balance Sheet just accumulates the consequences.
Learn to read it fluently, and you’ll see risks and opportunities that most investors completely miss.
⚠️ DISCLAIMER: Wealth Kite is an Educational Resource. Not a SEBI Registered Investment Advisor. Investments in securities market are subject to market risks.