Subscribe for real-time financial insights on Trade Target’s WhatsApp Channels
A retail investor and a mutual fund manager may like the same stock, but the way they analyse a company is very different. Most retail investors depend on news, hype, recent returns or only the profit and loss statement. Fund managers study all three financial statements, which include the Income Statement or Profit and Loss Statement, the Cash Flow Statement and the Balance Sheet. These financial statements help them understand the company’s real financial strength.
The P&L statement shows whether the company made a profit or loss, the cash flow statement explains how much actual cash came in and went out and the balance sheet shows the company’s overall financial position on a specific date. When analysed together, these statements help investors judge performance, stability and long-term growth potential more accurately than relying on earnings alone.
Before learning how to read a balance sheet like a fund manager, it is important to understand the balance sheet meaning and why it is one of the most important financial statements for any investor.
What is Balance Sheet?
Balance Sheet presents the company’s financial position. It shows what the company owns (assets) and what it owes (liabilities). It also includes shareholders’ equity, which represents the owners’ claim on the business.
Balance sheet follows one basic principle:
Total Assets = Total Liabilities + Shareholders’ Equity
It is called a “balance” sheet because both sides of this equation must always match.
The balance sheet helps you evaluate:
- How strong or weak the company’s financial foundation is
- Whether the company is overleveraged
- How effectively the company uses its resources
- Long-term stability and solvency
Standalone vs. Consolidated Financial Statements
Before analysing the balance sheet in detail, it is important to understand the two types of financial statements companies publish, standalone and consolidated. Standalone financial statements show only the parent company’s performance, while consolidated financial statements include all subsidiaries and give a complete picture of the group’s financial health. For large companies like Reliance Industries, consolidated results provide more accurate insights for financial analysis and valuation. Understanding this difference is important before learning how to read the balance sheet in detail.
How to Read a Balance Sheet like a Fund Manager?
First, let us understand how a balance sheet is structured. On the left side, you will find the company’s total assets and on the right side, you will see shareholders’ equity and liabilities.
Image Source: RIL Annual Report 2024-25
What Are Assets in a Balance Sheet?
Assets represent everything a company owns and uses to generate value. These can include office buildings, machinery, cash, inventories or even financial investments. Assets are the resources that support the company’s operations and help in generating revenue. Companies report their assets in two main categories: current & non-current:
Current assets are the resources a company expects to convert into cash within one year. Current assets play an important role in meeting short-term obligations and managing daily operations. Key components of current assets include:
- Inventories: Products that are currently in stock and are expected to be sold within the next 12 months.
- Financial Assets or Short-term Investments: These include investments that can be converted into cash within a year, such as marketable securities or short-term bonds. This is usually the company’s idle cash temporarily parked to earn returns.
- Trade Receivables: This represents the money owed by customers for goods or services already delivered. Since the company expects to receive this payment within one year.
- Cash and Cash Equivalents: This includes cash in hand, bank balances and other highly liquid assets that can be quickly converted into cash. It represents the funds the company already has available.
- Other Financial Assets (Current): These consist of short-term loans, deposits or advances that the company expects to receive back within a year. It is money temporarily given out but recoverable soon.
- Other Current Assets: This is a broad category that includes items such as expected tax refunds. These benefit the company in the short term but are not directly part of cash, inventory or receivables.
Non-current assets are long-term resources that remain with the company for more than one year. These may include:
- Property, Plant and Equipment (machinery, office, factories)
- Intangible assets: Patents, trademarks, software rights
- Capital Work in Progress (CWIP): CWIP includes projects still under construction such as new buildings, plants or machinery setups. Since these assets will benefit the company over several years once completed, they are classified as non-current assets.
- Financial assets: Include long-term investments such as shares, bonds or mutual funds that the company intends to hold for more than 5 years.
- Other Non-Current Assets: This is a miscellaneous category for long-term items that do not fit into the above sections. It may include long-term advances, long-term prepayments or other assets that the company expects to benefit from in future years
When analysing a balance sheet, you will notice that each asset category has a corresponding note number ( check slide 57). These notes provide detailed explanations of the items included in that category.
Understanding these asset categories helps investors evaluate how well a company manages its resources and how strong its short-term and long-term financial position is.
One important point to remember is that the money used to create these assets always comes from somewhere, either from shareholders, from the company’s own profits or from borrowings such as bank loans.
This is why the fundamental accounting equation is:
Assets = Equity + Liabilities
By now, we have covered the assets section. Next, let us understand the other side of the balance sheet, which is Equity and Liabilities.
What Are Equity and Liabilities in a Balance Sheet?
Equity represents the amount invested by the shareholders or owners of the company. It also includes the profits that the company has retained for future use, which are recorded as reserves.
Liabilities are the obligations or dues that the company must settle in the future. This may include borrowed money, unpaid expenses or any commitments the company is responsible for. Like assets, liabilities are divided into two categories:
- a. Non-Current Liabilities: Non-current liabilities are long-term obligations that the company expects to settle after more than one year. Non-current liabilities include:
- Long-term Borrowings: These include long-term loans, debentures and bonds that reflect the company’s overall long-term debt level.
- Lease Liabilities: Payments the company is committed to under long-term lease agreements.
- Other Financial Liabilities: These refer to long-term deposits or obligations that do not fall into the above categories.
- Provisions: These are long-term expected expenses related to employee benefits, warranties or other future obligations.
- Deferred Tax Liabilities (Net): These represent taxes that the company will need to pay in the future.
- Other Non-Current Liabilities: This includes miscellaneous long-term obligations that do not fit into the main classifications.
- b. Current Liabilities: Current liabilities are obligations that the company must settle within one year. Common items under current liabilities include:
- Short-term Borrowings: Short-term loans the company has taken, which must be repaid within a year. If these borrowings keep rising, investors should check whether the company has enough current assets to manage them.
- Lease Liabilities: If a company has taken an asset on lease, the payments due within the next 12 months are recorded as lease liabilities.
- Trade Payables:This represents the amount the company owes to its suppliers for goods or services received.
So far, we have covered what a balance sheet is, its structure and the key terms you need to know. Now, let us take a real example and analyse the balance sheet of Reliance Industries (not a recommendation). You can use the link below the screenshot to follow along. We will review each parameter using the Screener platform, the format may look different, but the underlying concepts remain the same.
Example – Reliance Industries Balance Sheet
Let’s start with Equity & Liability
- For Reliance, equity has been rising steadily over the years, showing that promoters and shareholders continue to invest in the company’s growth. It has increased from ₹2,940 crore in March 2014 to ₹13,532 crore in March 2025.
- Reserves and Surplus have also grown consistently from ₹1,95,747 crore in March 2014 to ₹8,29,668 crore in March 2025, indicating that the company is strengthening its internal funds, which can be used for future expansion.
Now, let us look at the Borrowings section.
- Reliance’s total borrowings have increased from ₹1,38,761 crore in FY14 to ₹3,74,313 crore in FY25. As we discussed earlier, borrowings are divided into long-term (non-current) and short-term (current) obligations.
- Long-term borrowings have risen from ₹1,01,019 crore in FY14 to ₹2,36,899 crore in March FY25, showing that the company has taken on significant debt to fund large projects and expansions.
- Short-term borrowings, which must be repaid within a year, have also increased from ₹32,792 crore in FY14 to ₹1,10,631 crore in March FY25. This makes it important for investors to check whether the company has enough short-term assets to comfortably manage its short-term debt.
- After considering all borrowing and other liability components, total liabilities have expanded from ₹4,28,843 crore in 2014 to ₹19,49,713 crore in March 2025.
To assess whether this level of borrowing is comfortable or excessive, a commonly used metric is the Debt-to-Equity Ratio, which provides a clear picture of the company’s leverage.
Source: Screener
Reliance currently has a debt-to-equity ratio of 0.43, which is considered to be in a comfortable range. In general, a lower debt-to-equity ratio is better. A ratio of 1 means the company has borrowed an amount equal to what shareholders have invested. If the ratio goes above 1, it indicates higher dependence on debt, which can increase financial risk.
Now, let us look at Reliance’s Assets
- Starting with non-current (fixed) assets, Reliance reported ₹1,41,417 crore in FY14, which increased to ₹9,99,393 crore by March 2025. These are the long-term assets explained earlier.
- Current assets have also grown consistently. They rose from ₹1,35,330 crore in 2014 to ₹4,45,581 crore in 2025. As discussed, current assets include inventories, trade receivables, cash and equivalents, loans and advances and other short-term items. On Screener, these items are grouped under the “Other Assets” category.
- When all components, current assets, non-current assets and other items are added together, we get Total Assets. For Reliance, total assets increased from ₹4,28,843 crore in 2014 to ₹19,49,713 crore in March 2025. This means the company’s asset base has expanded more than 4.5 times in just 11 years, which is a positive sign.
After the Debt-to-Equity ratio, another important metric to check is the Current Ratio, which shows whether a company’s current assets are sufficient to cover its current liabilities. A ratio around 1 is ideal and even 0.8 is manageable, while a very low ratio like 0.2 or 0.3 signals liquidity risk.
Reliance has a Current Ratio of 1.10, which indicates the company has enough short-term assets to comfortably meet its short-term obligations.
Final Words
This was the detailed breakdown of the balance sheet. I know today’s explanation included a lot of information, but understanding these concepts can truly help you become a smarter investor.
Financial statements may seem difficult in the beginning, but with a little practice, you will find them much easier and extremely useful. This topic may feel technical for many of you, but if you analyse the balance sheets of multiple companies, you will develop a much clearer understanding over time.
FAQs on How to Read a Balance Sheet
Why is reading a balance sheet important for investors?
It helps investors understand a company’s financial strength, debt levels, liquidity and long-term stability, enabling more informed and objective investment decisions.
What do fund managers look for in a balance sheet?
They examine assets, liabilities, equity, debt levels, cash position and trends over multiple years to assess financial health and future growth potential.
What is the most important part of a balance sheet?
All sections matter, but equity, total liabilities, borrowings and current assets provide the clearest picture of a company’s stability and risk.
How can a beginner start analysing a balance sheet?
Begin by understanding assets, liabilities, equity, debt ratios and liquidity metrics, then compare the company’s numbers across several years for clearer insights.
Should investors check standalone or consolidated financials?
Consolidated financials are more reliable because they include the performance of the parent company and all its subsidiaries, giving a complete financial picture.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
