Understanding Balance Sheet: Complete Guide for Indian Businesses

Meera’s Investment Decision

Meera was considering investing in two companies—Company A and Company B. Both had similar profits last year.

Her CA friend asked: “Did you check their balance sheets?”

Company A: ₹10 crore profit, but ₹100 crore debt Company B: ₹10 crore profit, with ₹50 crore cash and no debt

“Same profit, very different financial health,” her friend explained. “Company A is struggling with debt. Company B can survive a recession.”

The balance sheet told the full story that profit alone couldn’t.

What is a Balance Sheet?

Definition

A balance sheet is a financial statement that shows what a company owns (assets), what it owes (liabilities), and what belongs to owners (equity) at a specific point in time.

The Fundamental Equation

Assets = Liabilities + Shareholders' Equity

Always balances. Hence the name “Balance Sheet.”

Snapshot vs Video

Statement	Like a…	Shows
Balance Sheet	Photograph	Position at one moment
P&L Statement	Video	Activity over a period

Balance Sheet Structure (Indian Format)

Schedule III Format (Companies Act 2013)

Indian companies follow a specific format prescribed by law.

                    Balance Sheet as at 31st March 2024
────────────────────────────────────────────────────────────────────
                                              Note    Amount (₹)
────────────────────────────────────────────────────────────────────
EQUITY AND LIABILITIES

1. Shareholders' Funds
   (a) Share Capital                           X        XX,XX,XXX
   (b) Reserves and Surplus                    X        XX,XX,XXX

2. Non-Current Liabilities
   (a) Long-term Borrowings                    X        XX,XX,XXX
   (b) Deferred Tax Liabilities                X        XX,XX,XXX
   (c) Other Long-term Liabilities             X        XX,XX,XXX
   (d) Long-term Provisions                    X        XX,XX,XXX

3. Current Liabilities
   (a) Short-term Borrowings                   X        XX,XX,XXX
   (b) Trade Payables                          X        XX,XX,XXX
   (c) Other Current Liabilities               X        XX,XX,XXX
   (d) Short-term Provisions                   X        XX,XX,XXX

TOTAL                                                   XX,XX,XXX
────────────────────────────────────────────────────────────────────
ASSETS

1. Non-Current Assets
   (a) Property, Plant and Equipment           X        XX,XX,XXX
   (b) Capital Work-in-Progress                X        XX,XX,XXX
   (c) Intangible Assets                       X        XX,XX,XXX
   (d) Non-current Investments                 X        XX,XX,XXX
   (e) Deferred Tax Assets                     X        XX,XX,XXX
   (f) Long-term Loans and Advances            X        XX,XX,XXX
   (g) Other Non-current Assets                X        XX,XX,XXX

2. Current Assets
   (a) Current Investments                     X        XX,XX,XXX
   (b) Inventories                             X        XX,XX,XXX
   (c) Trade Receivables                       X        XX,XX,XXX
   (d) Cash and Cash Equivalents               X        XX,XX,XXX
   (e) Short-term Loans and Advances           X        XX,XX,XXX
   (f) Other Current Assets                    X        XX,XX,XXX

TOTAL                                                   XX,XX,XXX
────────────────────────────────────────────────────────────────────

Understanding Assets

What Are Assets?

Resources controlled by the company that will provide future economic benefits.

Non-Current Assets (Fixed Assets)

Assets held for more than one year.

Asset Type	Examples	Notes
Property, Plant & Equipment	Land, building, machinery	Depreciated over useful life
Capital Work-in-Progress	Factory being built	Not yet in use
Intangible Assets	Patents, trademarks, goodwill	Amortized over life
Non-current Investments	Shares in subsidiaries	Long-term holdings
Deferred Tax Assets	Tax paid in advance	Will reduce future tax

Current Assets

Assets expected to be converted to cash within one year.

Asset Type	What It Means	Example
Inventory	Goods for sale	Raw material, finished goods
Trade Receivables	Money owed by customers	Credit sales unpaid
Cash & Equivalents	Ready money	Bank balance, FDs < 3 months
Current Investments	Short-term investments	Liquid funds, treasury bills
Prepaid Expenses	Paid in advance	Rent paid ahead, insurance premium

Current vs Non-Current

Factor	Current	Non-Current
Time	≤ 1 year	> 1 year
Purpose	Operating cycle	Long-term use
Liquidity	High	Low

Understanding Liabilities

What Are Liabilities?

Obligations the company must pay in the future.

Non-Current Liabilities

Obligations due after more than one year.

Liability Type	What It Is	Example
Long-term Borrowings	Loans repayable > 1 year	Term loans, bonds, debentures
Deferred Tax Liabilities	Tax payable in future	Due to timing differences
Long-term Provisions	Future obligations estimated	Gratuity, leave encashment

Current Liabilities

Obligations due within one year.

Liability Type	What It Is	Example
Short-term Borrowings	Loans due < 1 year	Working capital loans, overdraft
Trade Payables	Money owed to suppliers	Credit purchases unpaid
Other Current Liabilities	Various short-term dues	Salaries payable, taxes due
Short-term Provisions	Near-term obligations	Warranty provisions

Understanding Equity

What Is Shareholders’ Equity?

The residual interest after deducting liabilities from assets. Essentially, what belongs to shareholders.

Equity = Assets - Liabilities

Components of Equity

Component	What It Is
Share Capital	Money received from issuing shares
Securities Premium	Amount received above face value
Retained Earnings	Accumulated profits not distributed
General Reserve	Profits set aside for future
Other Reserves	Revaluation reserve, etc.

Example

Company issued 10 lakh shares:

Face value: ₹10 per share
Issue price: ₹50 per share

Item	Calculation	Amount
Share Capital	10 lakh × ₹10	₹1 crore
Securities Premium	10 lakh × ₹40	₹4 crore
Total Equity Raised		₹5 crore

Reading a Real Balance Sheet

Example: Simplified Balance Sheet of ABC Ltd.

                Balance Sheet as at 31st March 2024
                           (₹ in Lakhs)
────────────────────────────────────────────────────────
EQUITY AND LIABILITIES
────────────────────────────────────────────────────────
Shareholders' Funds
  Share Capital                                    500
  Reserves and Surplus                             800
                                                -------
  Total Equity                                   1,300

Non-Current Liabilities
  Long-term Borrowings                             400
  Deferred Tax Liabilities                          50
                                                -------
  Total Non-Current Liabilities                    450

Current Liabilities
  Short-term Borrowings                            150
  Trade Payables                                   200
  Other Current Liabilities                        100
                                                -------
  Total Current Liabilities                        450
────────────────────────────────────────────────────────
TOTAL EQUITY AND LIABILITIES                     2,200
────────────────────────────────────────────────────────

ASSETS
────────────────────────────────────────────────────────
Non-Current Assets
  Property, Plant and Equipment                    900
  Intangible Assets                                 50
  Non-current Investments                          100
                                                -------
  Total Non-Current Assets                       1,050

Current Assets
  Inventories                                      400
  Trade Receivables                                350
  Cash and Cash Equivalents                        300
  Other Current Assets                             100
                                                -------
  Total Current Assets                           1,150
────────────────────────────────────────────────────────
TOTAL ASSETS                                     2,200
────────────────────────────────────────────────────────

Quick Analysis

Metric	Calculation	Result	Interpretation
Total Debt	400 + 150	₹550 L	Moderate borrowing
Debt/Equity	550/1300	0.42	Conservative leverage
Current Ratio	1150/450	2.56	Good liquidity
Cash Position		₹300 L	Strong cash buffer

Key Balance Sheet Ratios

Liquidity Ratios

1. Current Ratio

Current Ratio = Current Assets / Current Liabilities

Range	Interpretation
< 1	Liquidity problem
1-2	Adequate
> 2	Very liquid (or excess inventory/receivables)

2. Quick Ratio (Acid Test)

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

More stringent than current ratio
Ideal: > 1

Leverage Ratios

1. Debt to Equity Ratio

D/E = Total Debt / Shareholders' Equity

Range	Interpretation
< 0.5	Conservative
0.5-1	Moderate
> 1	Aggressive (risky)

2. Interest Coverage Ratio (needs P&L data)

Interest Coverage = EBIT / Interest Expense

Should be > 3 for comfortable debt servicing

Efficiency Ratios

1. Inventory Turnover

Inventory Turnover = Cost of Goods Sold / Average Inventory

Higher is better (efficient inventory management)

2. Receivables Turnover

Receivables Turnover = Credit Sales / Average Receivables

Higher means faster collection

Balance Sheet Analysis: What to Look For

Green Flags (Positive Signs)

Sign	What It Indicates
Growing equity	Profits being retained
More assets than last year	Business expanding
Decreasing debt	Deleveraging
High cash position	Financial strength
Improving current ratio	Better liquidity

Red Flags (Warning Signs)

Sign	What It Could Mean
Negative equity	Losses eroded capital
Rapidly increasing debt	Funding problems
Inventory piling up	Products not selling
Receivables growing faster than sales	Collection problems
Cash declining consistently	Cash burn
Increasing intangibles without reason	Earnings manipulation
Related party transactions	Potential fraud

Comparing Balance Sheets

Horizontal Analysis (Trend)

Compare same company over years.

Item	FY22	FY23	FY24	Trend
Total Assets	₹100 Cr	₹120 Cr	₹150 Cr	Growing ✓
Total Debt	₹30 Cr	₹35 Cr	₹25 Cr	Reducing ✓
Inventory	₹10 Cr	₹15 Cr	₹25 Cr	Rising fast ⚠️

Vertical Analysis (Common Size)

Express each item as % of total.

Item	Amount	% of Total Assets
Fixed Assets	₹60 Cr	40%
Current Assets	₹90 Cr	60%
Total	₹150 Cr	100%

Useful for comparing companies of different sizes.

Peer Comparison

Metric	ABC Ltd	Industry Average
Current Ratio	2.5	1.5
D/E Ratio	0.4	0.8
Return on Assets	12%	10%

ABC Ltd is more liquid and less leveraged than peers.

Indian Company Examples

TCS Balance Sheet Highlights (Illustrative)

Item	Amount (₹ Cr)	Observation
Cash & Equivalents	50,000+	Extremely cash-rich
Total Debt	Near zero	Almost debt-free
Reserves	Very high	Decades of profits accumulated
D/E Ratio	< 0.1	Conservative

Interpretation: TCS has a fortress balance sheet—minimal debt, huge cash.

Tata Steel Balance Sheet Highlights (Illustrative)

Item	Amount (₹ Cr)	Observation
Property, Plant & Equipment	Very high	Asset-heavy industry
Total Debt	High	Typical for steel
D/E Ratio	> 1	Leveraged
Working Capital	Significant	Inventory-heavy

Interpretation: Capital-intensive business requires debt; need to monitor debt servicing.

Balance Sheet vs P&L vs Cash Flow

The Relationship

Statement	Question Answered
Balance Sheet	What do we own and owe?
P&L Statement	Did we make profit?
Cash Flow Statement	Where did cash come from and go?

How They Connect

P&L profit flows to Balance Sheet (Retained Earnings)
Cash Flow explains change in Balance Sheet cash
Depreciation in P&L reduces Balance Sheet asset value
Loan taken shows in Cash Flow and Balance Sheet

Common Balance Sheet Mistakes

Mistake 1: Ignoring Off-Balance Sheet Items

Problem: Some obligations don’t appear on balance sheet Examples: Operating leases (old standard), guarantees Solution: Read notes to accounts carefully

Mistake 2: Focusing Only on Size

Problem: “Assets of ₹1000 Cr means it’s big” Reality: Assets could be funded mostly by debt Solution: Always look at composition

Mistake 3: Ignoring Quality of Assets

Problem: ₹100 Cr receivables looks good Reality: Could be bad debts waiting to be written off Solution: Check aging of receivables, provisioning

Mistake 4: Not Reading Notes

Problem: Skipping notes to accounts Reality: Notes contain critical details Solution: Always read notes for major items

Balance Sheet for Different Industries

Manufacturing (e.g., Auto)

Characteristics	Reason
High fixed assets	Factories, machinery
Significant inventory	Raw material, WIP, finished goods
Moderate receivables	Dealer credit
Often leveraged	Capital-intensive

IT Services (e.g., Infosys)

Characteristics	Reason
Low fixed assets	No factories needed
No inventory	Service business
High receivables	Client billings
High cash	Profitable, asset-light

Banking (e.g., HDFC Bank)

Characteristics	Reason
Loans are assets	Money lent to customers
Deposits are liabilities	Money owed to depositors
Low fixed assets	Branches, IT
Highly leveraged	Nature of banking

Action Items for Investors

Before Investing

Check debt levels (D/E ratio)
Verify cash position
Look at current ratio
Compare with previous years
Compare with industry peers
Read notes to accounts
Check related party transactions

Regular Monitoring

Review balance sheet quarterly
Track debt trajectory
Watch for inventory buildup
Monitor receivables vs sales growth
Note any major changes

Resources

Where to Find Balance Sheets

Source	Access
Company website	Investor Relations section
BSE/NSE	Company page → Financials
Screener.in	Easy-to-read format
Annual Reports	Complete with notes

Learning Resources

ICAI study material
Zerodha Varsity (fundamental analysis)
Company annual reports (practice reading)

Disclaimer

This guide is for educational purposes. Balance sheet analysis is one part of investment decision-making. Financial statements can be complex and sometimes manipulated. Consider consulting a qualified financial advisor before making investment decisions.

Summary

The balance sheet tells you:

What company owns (Assets)
What company owes (Liabilities)
What belongs to shareholders (Equity)
Financial strength (Ratios)
Risk level (Leverage)

Master balance sheet reading, and you’ll understand businesses—and investments—far better than those who only look at profits.

LinkedIn: “Two companies, same profit: ₹10 Cr. Company A: ₹100 Cr debt Company B: ₹50 Cr cash, zero debt. Same profit, vastly different risk. The P&L shows what you earned. The Balance Sheet shows how safe you are. Learn to read both before investing. #BalanceSheet #InvestorEducation”

Twitter/X: “Balance Sheet 101:

Assets = Liabilities + Equity

📦 Assets: What you own 💳 Liabilities: What you owe 💰 Equity: What’s left for shareholders

Current Ratio > 2? ✓ Liquid D/E < 1? ✓ Safe Cash growing? ✓ Strong

Simple checks, powerful insights. #Investing”

Instagram: “Red flags in a Balance Sheet 🚩

❌ Debt growing faster than assets ❌ Inventory piling up ❌ Receivables older than 90 days ❌ Cash declining every year ❌ Negative equity

Green flags 🟢

✅ Cash-rich ✅ Low debt ✅ Healthy current ratio ✅ Equity growing

Save this for your next investment analysis! 📊

#BalanceSheet #InvestingTips”

Documentation