How to Read a Company's Balance Sheet ?

How to Read a Company’s Balance Sheet: A Practical Checklist for Stock Market Investors in Sri Lanka

If you've been investing in the Colombo Stock Market using your instincts and a good read of company news—like I have for over three decades—this article is for you. Even without formal training in accounting or finance, understanding a company's balance sheet can help you spot strong stocks, avoid hidden risks, and make better-informed decisions.

This checklist is designed for Sri Lankan investors who want a simple, practical approach to assess a company’s past performance and likely future trajectory, using just the publicly available audited financial statements.

I. How to Tell if a Company Performed Well

  • Assets vs. Liabilities: Total Assets > Total Liabilities indicates solvency and financial strength.
  • Shareholder Equity Growth: Rising equity over time means profits are being reinvested, not just paid out.
  • Return on Equity (ROE): Net Profit / Shareholder Equity. ROE consistently above 12% shows effective use of capital.
  • Debt-to-Equity Ratio: Below 1 (or within industry norm) indicates a healthy balance of debt and ownership.
  • Current Ratio: Current Assets / Current Liabilities. Between 1.5 and 3 suggests strong liquidity.

II. Signs of Future Performance (Good or Bad)

  • Capital Expenditure (CAPEX): Shows company is investing in growth or tech—generally a good sign.
  • Cash & Cash Equivalents: Strong cash positions mean flexibility, but too much idle cash may raise questions.
  • Dividend Payout Ratio: Balanced payouts indicate stability and smart capital management.
  • Deferred Tax Liabilities / Assets: Watch for sudden changes—they can impact earnings.
  • Share Buybacks or Dilution: Buybacks reflect management confidence; dilution could be a red flag.

III. Hidden Pitfalls in the Balance Sheet

  • Receivables as a % of Revenue: Rising receivables without revenue growth may signal trouble collecting cash.
  • Intangible Assets: Especially goodwill—check if it's inflated compared to industry norms.
  • Contingent Liabilities: Look for lawsuits, fines, or obligations in the notes section.
  • Unusual Asset Sales: Frequent or significant asset sales could indicate cash flow issues.

📣 Let’s Learn Together

If you found this article useful or have your own tips and insights on balance sheet analysis, please share them in the comments below. Your feedback not only helps me refine future posts but also supports fellow Sri Lankan retail investors in making better decisions. Let’s build a more informed and empowered investment community together.

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