Question: 

Why do stock investors read the balance sheet of a company before investing? 

 

Answer: 

This is because stock investors want to find out if the stock is financially solid for if it is stable, it is able to not only remain resilient during an economic crisis but also possesses the ability to invest to grow its sales and profits, thus, raising the value of shares of the company. 

 

So, the next question is: ‘How to read a company’s balance sheet?’ First, here is a snapshot of the statement of financial position (also known as balance sheet) of Sheng Siong Group Ltd, a well-known grocer listed in Singapore.

 

In this article, I’ll list down 5 key items to take note of in a balance sheet so that you have an easier time in interpreting it. They are as follows: 

 


#1: Asset = Liabilities + Equity

For a start, a balance sheet is named as such because the amount of assets the company has must be equivalent to its two main sources of funding namely, its liabilities (debt) and equity (owner’s capital). In Sheng Siong’s case, the amount of assets it has is worth S$ 532.8 million and it is funded by total equity worth S$ 315.4 million and total liabilities worth S$ 217.4 million. From the statement of financial position above, the summary of it can be illustrated as follows: 

 

#2: 2 Types of Assets

Assets consist of cash, items that are convertible into cash and items which can be generating recurring cash flow to Sheng Siong. There are two types of assets namely, non-current assets and current assets. 

 

Non-current assets are assets which are not intended to be converted into cash in the next 12 months. They include Sheng Siong’s properties, plant, equipment and machineries, furniture, motor vehicles, computers and the list goes on. The assets are mostly intended to generate recurring cash flow to the company. 

Current assets consist of either cash or items that are intended to be converted into cash for the next 12 months. These items include its inventories and trade receivables. As a grocer, Sheng Siong’s inventories would mostly include its F&B products, toiletries and daily consumable products. Whereas, trade receivables would include unpaid sales made to its customers. In other words, Sheng Siong has sold its products to its customers but they have yet to pay and promise that they will settle their payment within 12 months.



In 2019, Sheng Siong reported to have S$ 356.2 million and S$ 176.6 million in non-current assets and current assets. Thus, if we expand the diagram above to include both non-current assets and current assets, it would be as follows:

 

#3: 2 Types of Liabilities 

Liabilities are debt owed by Sheng Siong to its creditors. There are two types of liabilities namely, non-current liabilities and current liabilities. 

 

Non-current liabilities are liabilities that Sheng Siong would not be paying off in the next 12 months. Meanwhile, current liabilities are ones where Sheng Siong intends to settle in 12 months time. Here, let me share with you an example for the purpose of illustrating the difference between the two. 

 

For instance, you have an outstanding car loan of $50,000, where you would be paying off $10,000 of the loan’s principal over the next 12 months. Meanwhile, the other $40,000 of the loan’s principal would be paid off beginning from the  thirteenth month onwards to your final installment. Hence, the $10,000 is your current liability while the $40,000 is treated as your non-current liabilities. 

 

In 2019, Sheng Siong reported to have S$ 356.2 million and S$ 176.6 million in non-current assets and current assets. Thus, if we expand the diagram above to include both non-current assets and current assets, it would be as follows:

 

#4: 2 Types of Equity 

In layman’s term, equity is the capital invested into Sheng Siong by its investors. Likewise, there are two types of equity namely, shareholders’ equity and equity that is attributed to non-controlling interest (NCI).


As an investor, if I invest in Sheng Siong, I would be a minor shareholder, hence,
my capital will form part of its shareholders’ equity. This figure is important as I will use it to calculate its net asset value (NAV) or book value per share. I would explain its practical usage in Point 5. 

 

Meanwhile, who is non-controlling interest (NCI)? 

 

First, we have to understand that all financial statements are reported in such a way which assumes that Sheng Siong owns 100% interest in all of its subsidiary companies. Out of which, we will have its figure for total equity. 

 

Second, clearly, Sheng Siong has a subsidiary where its interest is 60% only. This subsidiary is Sheng Siong (China) Supermarket Co. Ltd as shown below. As such, the other 40% stake of this subsidiary is owned by third-party owners who are not shareholders of Sheng Siong. These third-party owners would be known as non-controlling interest (NCI), and thus, the value of their shareholdings which is worth S$ 2.1 million shall be excluded when calculating shareholders’ equity.

 

 

As a result, we will have the following: 

 

#5: Net Asset Value (NAV) or Book Value 

From above, we have learnt that Sheng Siong reported to have S$ 313.3 million in shareholders’ equity in 2019 and it has 1,503,537,000 shares issued. Here, to calculate its net asset value a share, I will take S$ 313.3 million in shareholders’ equity and divide it with 1,503.5 million shares. Out of which, Sheng Siong’s net asset value (NAV) would be S$ 0.208 a share. 

 

Subsequently, we take its NAV per share figures and compare it with Sheng Siong’s stock price. For instance, Sheng Siong is trading at S$ 1.55 a share and its NAV per share is S$ 0.208. Therefore, by dividing stock price of S$ 1.55 with EPS of S$ 0.208, it has a P/B Ratio of 7.45. The question is: ‘Would you invest S$ 7.45 for every S$ 1.00 in NAV of Sheng Siong? 

 

From them, you can make a good assessment if you want to invest into it or not by yourself? 

 

Conclusion: 

The above article is meant to introduce the basics of reading and interpreting a statement of financial position (balance sheet). Mastering the basics is helpful to stock investors as they can use the above information to identify stocks that are financially solid with resilient balance sheets from others which are not. So, in summary, 

 

 


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 450+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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