The balance sheet (balanço patrimonial)

The balance sheet is a photograph of the company on one date. It always obeys a single identity:

Assets = Liabilities + Equity
(Ativo = Passivo + Patrimonio Liquido)

The three blocks

• Assets (ativo) — everything the company owns or is owed: cash, inventory, receivables, factories, equipment, intangibles. Split into current (turns to cash within a year) and non-current.
• Liabilities (passivo) — everything it owes to others: suppliers, loans, taxes, salaries. Also split into current and non-current.
• Equity (patrimonio liquido) — what is left for the owners after every debt is paid. It is the residual: Assets minus Liabilities.

A worked snapshot

Suppose a company reports:

Total assets (ativo total)        = 1,000
Total liabilities (passivo)       =   600
Equity (patrimonio liquido)       =   400   (1,000 - 600)

Equity of 400 is the book value of the business — the accounting net worth that backs every share. If there are 100 shares outstanding, book value per share is 400 / 100 = 4.00. We use that figure for the P/B ratio later.

What to look for

• Cash vs debt. Compare cash to total debt. A company drowning in loans is fragile no matter how profitable.
• Liquidity. Current assets should comfortably exceed current liabilities, or short-term bills get hard to pay.
• What the assets actually are. Equity propped up by goodwill and intangibles is softer than equity backed by cash and hard assets.

The balance sheet tells you how sturdy the company is. The next statement tells you how well it performs.