Finance
by Benjamin Graham
Can you read a balance sheet?
In 1937 Benjamin Graham and Spencer Meredith wrote a short guide for people who own shares but were never taught accounts. It walks through the balance sheet and the income account one item at a time, and for each one asks what it tells an investor about the company.
Hear a sample · read by Laura
The balance sheet describes a single day. It lists what the company owns, what it owes and what's left over for the shareholders. The income account covers a whole year and shows what the business earned. Graham wants you able to read both before you buy a share.
Current assets are cash, money owed by customers and goods waiting to be sold. Current liabilities are debts due within a year. The first minus the second is working capital, and the first divided by the second is the current ratio. Graham reads a healthy margin here as financial strength.
When Graham works out book value, what each share would claim from the company's assets, he first strikes out intangibles such as goodwill, patents and trademarks. They might be worth a fortune or nothing at all, and the balance sheet can't tell you which.
Take the current assets and subtract every debt, plus any preferred stock ranking ahead of the ordinary shares. Graham calls the result net current asset value. When shares sell below it, the buyer gets the plant and machinery for nothing, and Graham treats the price as a likely bargain.
A single year's profit can be flattered by a skimpy depreciation charge or dented by a one-off loss. Graham judges what a company can earn from its record over a run of years, and from how steady that record has been.
Balance sheet
The balance sheet shows what a company owns and owes on a single day.
Income account
The income account shows what the company earned over the year. For most firms, that says more about value.
Current ratio
Graham liked current assets to be at least twice the bills due within a year.
Book value
Book value is what would be left for each share if the assets fetched their listed values and all debts were paid.
Several years
Judge earnings over several years, since a single year can flatter or hide a lot.
One thing to try
Open the latest annual report of a company you know. Divide current assets by current liabilities. Then take shareholders' equity, knock off goodwill and other intangibles, and divide by the number of shares. Put that figure next to today's share price and see how far apart they are.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. The Interpretation of Financial Statements comes with a Name That Idea round to make it stick.
Get the whole book on KnotdOpen in the appCan you read a balance sheet? In 1937 Benjamin Graham and Spencer Meredith wrote a short guide for people who own shares but were never taught accounts. It walks through the balance sheet and the income account one item at a time, and for each one asks what it tells an investor about the company.
One day, then one year; Can it pay its bills?; Leave out the goodwill; Factories thrown in free; One year proves little.
Open the latest annual report of a company you know. Divide current assets by current liabilities. Then take shareholders' equity, knock off goodwill and other intangibles, and divide by the number of shares. Put that figure next to today's share price and see how far apart they are.
Yes. Knotd has the key ideas from The Interpretation of Financial Statements in a few minutes, in plain words, plus a Name That Idea round to test them. It's one of 250+ non-fiction books in the app.
