Last Updated on January 15, 2019 by Sultan Beardsley
A company’s balance sheet reflects their financial condition at a given point in time. They are usually reported on a quarterly and annual basis. For example company XYZ would report it’s balance sheet for the first quarter (Q1) of 2018 stating its financial condition/position after all transaction leading up to that date. Balance sheets are included in a Securities and Exchange Commision (SEC) document called a Form 10-Q. The three main parts of a balance sheet are Assets, Liabilities, and Shareholder Equity.
Example: Insmed Inc. (NASDAQ: INSM) Form 10-Q reported on August 2nd, 2018
Written at the top of the document you’ll see all values are reported “in thousands except par value and share data”. Let’s break it all down
- Cash and cash equivalents: The cash and liquid assets that can be easily converted to cash owned by the company. INSM had $381,165 and 634,329 million dollars in cash on December 31st, 2017 and June 30th 2018 respectively.
- Prepaid expenses and other current assets: INSM had $10,929 and 8,279 million dollars respectively allocated to prepaid expenses. In other words cash needed for things like rent or employee salaries.
- Total current assets = Cash and cash equivalents + Prepaid expenses and other current assets
- In-process Research and Development: Cash spent on research and development such as clinical trials, filing New Drug Applications, manufacturing compounds, etc.
- Fixed assets, net: All assets, contra assets (negative assets), and liabilities relating to the company’s fixed assets. The formula to determine this number is:
- + Fixed asset purchase price (asset)
+ Subsequent additions to existing assets (asset)
– Accumulated depreciation (contra asset)
– Accumulated asset impairment (contra asset)
– Liabilities associated with the fixed assets (liability)
- + Fixed asset purchase price (asset)
- Other assets: Minor assets that do not fit into one of the above categories. Some examples are employee advances, deferred tax assets, and bond issuances.
- Total assets: Sum of all assets
Liabilities and Shareholders Equity
- Accounts payable: Money owed by Insmed to its suppliers, creditors, etc. Its essentially the company’s short-term debt obligations that must be paid off by a certain date.
- Accrued expenses: The opposite of prepaid expenses. Expenses incurred by the company to be paid by some future date. Some examples are interest and taxes.
- Other current liabilities: Liabilities that do not fit in one of the above categories.
- Total current liabilities: Sum of all the current liabilities.
- Long-term debt, net = (Short-Term Debt + Long-Term Debt) – Cash and Cash Equivalents. It’s a measure of the company’s ability to repay its debt.
- Other long-term liabilities: Payments not due within the next 12 months but need to be paid eventually. Some examples are pensions, deferred taxes, and leases.
- Total liabilities: The total of all debit the company is liable to repay.
- Common stock, $0.01 par value; 500,000,000 authorized shares, 77,038,788 and 76,610,508 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively:
- Insmed Inc. authorized for additional 500 million shares to be ‘issued’, or ‘sold’. On June 30th 2018 and December 31st, 2017 77,038,788 and 76,610,508 shares were still for sale respectively. Investors could buy these shares on the open market.
- Additional paid-in capital: The excess amount of money paid by investors per share for INSM stock. It can be thought of as profit from selling shares for a price greater than they were purchased for.
- Accumulated deficit: Negative retained earnings. This figure reflects the difference in the amount of money Insmed generated vs. the amount lost to expenses, debts, dividends, etc. Accumulated deficit is common among clinical stage biotech companies because they generally have none or very little revenue because they are still developing a product (drug) to sell.
- Accumulated other comprehensive income (loss): Unrealized gains or losses from investments or transactions.
- Total shareholder equity: This is calculated as ‘total assets – total liabilities’. If positive the company has enough financial strength to cover its liabilities. If it’s negative the company cannot do cover all its liabilities. If prolonged the company can become ‘insolvent’. In other words, they can no longer pay their bills and go under. Bankruptcy on the other hand is when the IRS or courts decides this for the company and dictates the selling of assets.