How to Read a Balance Sheet

This guide is part of our [Financial Statements course](/learn/track/financial-statements).

A balance sheet is a snapshot of what a company owns and owes on a single day. Where the income statement shows profit over a period and the cash flow statement shows cash moving in and out, the balance sheet shows financial position — how strong or fragile the business is right now.

For an investor, it answers one blunt question: if things go wrong, can this company survive? This guide explains each part in plain English, walks through a real FTSE 100 balance sheet line by line, and shows you the handful of numbers that actually matter.

How to read a balance sheet in five steps

If you only have ten minutes with an annual report, do this and nothing else:

Check the equation balances. Total assets should equal total liabilities plus equity. It always will in a published report — but doing the sum tells you which three numbers you are working with.
Work out net debt. Total borrowings minus cash. This is the single most important number on the page, because it decides how much room the company has when trading turns down.
Divide current assets by current liabilities. That is the current ratio. It tells you whether the next twelve months of bills are covered by the next twelve months of cash.
Compare goodwill to equity. If goodwill is a large share of the shareholders' stake, much of that "equity" is an accounting entry from past takeovers rather than anything you could sell.
Read the same four numbers from last year. Direction matters more than level. Debt rising and cash falling is a story; one year's snapshot is not.

Everything below explains why each of those five steps matters, and the worked example further down applies all five to a real company.

The one equation that holds it together

Every balance sheet obeys a single rule:

**Assets = Liabilities + Equity**

Everything the company owns (assets) was paid for either with money it borrowed (liabilities) or money that belongs to shareholders (equity). The two sides always balance — that's where the name comes from.

Assets — what the company owns or is owed
Liabilities — what the company owes to others
Equity — what's left for shareholders after liabilities are paid

Assets: what the company owns

Assets are split by how quickly they turn into cash.

Current assets (usable within a year):

Cash and cash equivalents
Inventory (stock waiting to be sold)
Receivables (money customers owe)

Non-current assets (longer-term):

Property, plant and equipment (factories, machines)
Intangibles (brands, patents, and goodwill from acquisitions)
Long-term investments

Watch goodwill carefully. It's the premium paid over fair value in past takeovers, and a large goodwill balance can be written off suddenly if an acquisition disappoints — instantly wiping out equity.

Liabilities: what the company owes

Liabilities are also split by timing.

Current liabilities (due within a year):

Payables (money owed to suppliers)
Short-term debt
Tax due

Non-current liabilities (due later):

Long-term borrowings and bonds
Pension obligations
Deferred tax

The key figure investors extract here is net debt — total borrowings minus cash. A company with more cash than debt (net cash) has a fortress balance sheet; one drowning in debt has little room for error when profits dip.

Equity: what's left for shareholders

Equity — also called shareholders' funds or book value — is assets minus liabilities. It represents the owners' stake. It includes share capital, retained earnings (profits kept in the business), and reserves.

Comparing the share price to equity per share gives you the price-to-book ratio, a classic value measure. Equity is also the denominator in return on equity, which shows how much profit the company squeezes from shareholders' money.

The ratios that actually matter

You don't need to read every line. Focus on these:

Ratio	What it measures	Rough guide
Current ratio	Current assets ÷ current liabilities	Above 1 means short-term bills are covered
Net debt	Total debt − cash	Compare to profit (EBITDA); under ~2× is comfortable
Debt-to-equity	Total debt ÷ equity	Higher = more financial risk
Working capital	Current assets − current liabilities	Positive keeps the lights on day to day

See working capital and debt-to-equity for worked detail on each.

A single ratio in isolation means little. A supermarket runs on thin working capital by design; a software firm may carry huge cash. Always compare a company to its own history and its sector peers.

A worked example: reading Tesco's balance sheet

Theory only goes so far. Here is the consolidated balance sheet of Tesco as at 28 February 2026, reduced to the lines that matter (all figures in £m):

Line	£m
Cash and cash equivalents	2,515
Inventory	2,840
Receivables	1,350
Total current assets	8,483
Property, plant and equipment	23,505
Goodwill and other intangibles	5,092
Total assets	39,474
Total current liabilities	14,329
Total liabilities	28,017
Total equity	11,457
Total debt	15,080

Step 1 — does it balance? £28,017m of liabilities plus £11,457m of equity is £39,474m, which is exactly total assets. It balances, as it must.

Step 2 — net debt. Total debt of £15,080m less cash of £2,515m gives net debt of roughly £12,565m. Note that Tesco's own reported net debt figure will differ from this: companies define the measure themselves, usually excluding some lease liabilities and including short-term investments alongside cash. Neither number is wrong — but if you are comparing two companies, compute it the same way for both rather than trusting each company's own definition.

Step 3 — the current ratio. £8,483m of current assets against £14,329m of current liabilities is a current ratio of 0.59, and working capital of minus £5,846m. On the rough guide above, anything below 1 looks alarming.

It is not. And understanding why is the whole point of this section.

Tesco collects cash from customers at the till the moment goods leave the shop, but pays its suppliers on terms of 30 to 60 days. It is therefore permanently holding suppliers' money — negative working capital is the business model, not a warning sign. A supermarket with a current ratio of 2.0 would be a supermarket doing something strange with its cash.

Now apply the same 0.59 to a construction firm that bills clients months in arrears and pays subcontractors weekly, and it would be a genuine solvency question. This is why the rough guides in the table above are starting points, not verdicts. The ratio is identical; the conclusion is opposite.

Step 4 — goodwill against equity. Goodwill and intangibles of £5,092m sit against total equity of £11,457m, so roughly 44 percent of the shareholders' stake is intangible. That is not unusual for a company built partly through acquisition, but it does mean a large impairment would take a visible bite out of book value — which matters if you are using price-to-book to judge the shares.

Step 5 — the direction. None of the above tells you whether Tesco is getting stronger or weaker. For that you need the same five numbers from the prior year, which is why every balance sheet in a report is printed with a comparative column beside it. Read the column, not the number.

Red flags to watch for

Rising debt with falling cash — the balance sheet is weakening even if profits look fine.
Goodwill larger than tangible equity — a big impairment could erase the shareholder stake.
Receivables growing faster than sales — customers may be struggling to pay.
Negative equity — liabilities exceed assets; the company is technically insolvent on paper.
Pension deficits — a large gap can swallow years of profit.

How the balance sheet connects to the other statements

The three statements are one story told three ways. Profit from the income statement flows into retained earnings on the balance sheet. Cash on the balance sheet is explained by the cash flow statement. Reading all three together — never one alone — is how you judge a business properly.

Analyse any balance sheet on Openbook

Reading a PDF annual report line by line is slow. Openbook pulls the balance sheet for every UK-listed company into a clean, comparable view — net debt, book value, debt ratios and a Balance Sheet strength score, updated automatically.

Look up a company and check its financial position in seconds: AstraZeneca, Lloyds, Shell or Tesco.

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Frequently asked

Common questions

What is a balance sheet in simple terms?

A balance sheet is a snapshot of what a company owns (assets), what it owes (liabilities) and what's left for shareholders (equity) on a specific date. It shows the financial position and strength of a business at a single point in time.

What are the three main parts of a balance sheet?

Assets (what the company owns), liabilities (what it owes) and equity (the shareholders' stake). They always satisfy the equation Assets = Liabilities + Equity.

What should I look for first on a balance sheet?

Start with net debt (total borrowings minus cash) and the current ratio (current assets divided by current liabilities). Together they tell you whether the company can meet its obligations and how much financial risk it carries.

What is a strong balance sheet?

A strong balance sheet typically has manageable or no net debt, enough current assets to cover short-term liabilities, and equity that is genuinely backed by real (tangible) assets rather than mostly goodwill. Strength is always relative to the company's sector.

What is the difference between a balance sheet and an income statement?

A balance sheet shows financial position on a single day — what the company owns and owes. An income statement shows financial performance over a period — revenue, costs and profit. You need both, plus the cash flow statement, for a full picture.

What is a good current ratio?

There is no universal answer, and treating one as universal is the most common mistake beginners make. Above 1 means short-term assets cover short-term bills, which suits most industries. But supermarkets and other retailers routinely run below 1 because they take cash at the till and pay suppliers weeks later — Tesco's was 0.59 at February 2026 and the business is not in difficulty. Always compare a company to its own sector.

How do you tell if a balance sheet is healthy?

Look at four things together: net debt relative to profits (under roughly 2× EBITDA is comfortable for most businesses), whether current assets cover current liabilities in the context of that industry, how much of the equity is goodwill rather than tangible assets, and the direction all of those have moved over the last two or three years. A single strong number alongside three deteriorating ones is not health.

Why is it called a balance sheet?

Because the two sides always balance. Everything a company owns was funded either by borrowing (liabilities) or by shareholders (equity), so assets must equal liabilities plus equity by definition. If a published balance sheet did not balance, it would be an error rather than a finding.

Can a company have negative equity?

Yes. Negative equity means liabilities exceed assets, and the company is technically insolvent on a balance-sheet basis. It happens after sustained losses, after large goodwill write-offs, or after heavily debt-funded buybacks. It is not automatically fatal — a business generating strong cash can trade through it — but it removes the cushion entirely and is worth understanding before investing.

How often do UK companies publish a balance sheet?

UK-listed companies publish a full audited balance sheet in the annual report, and a condensed unaudited one in the half-year interim results. Some also give limited balance-sheet detail in quarterly trading updates. The annual figure is the one to use for comparison, because it is audited and prepared on a consistent date each year. ---