What is a balance sheet?
The balance sheet is a snapshot of a company's net worth at a given date. On the left, assets: everything it owns. On the right, liabilities: where the money that financed those assets came from. The two columns always balance, to the euro, because everything that is owned was necessarily financed in one way or another.
This fundamental equality, assets = liabilities, is not an accounting coincidence: it is the very logic of the balance sheet. Each euro of assets (a machine, inventory, a receivable, cash) was paid for by a resource recorded under liabilities: either the shareholders' money (equity) or borrowed money (debt). Reading a balance sheet therefore means reading two mirror questions: what does the company own, and who paid for it.
The balance sheet differs from the income statement, which retraces a film (the income and expenses of a period). The balance sheet, by contrast, is a freeze-frame: it states where the company stands at 31 December, not how it got there. The two complement each other: the profit for the year, generated by the income statement, comes to increase or reduce equity on the balance sheet. A profitable company thus strengthens its balance sheet year after year.
Assets: what the company owns
Assets are read from top to bottom, from the most durable to the most liquid. At the top, fixed assets: what serves the business over several years (buildings, machines, software, holdings). At the bottom, current assets: what turns over in the operating cycle (inventory, trade receivables, cash). This distinction conditions the whole analysis of financial balance.
Fixed assets represent the working tool. They include tangible fixed assets (land, buildings, equipment), intangible ones (patents, licences, acquired goodwill) and financial ones (holdings in other companies, guarantees). These assets wear out: this is depreciation, which spreads their cost over their useful life and explains why equipment bought for EUR 100,000 may appear at only EUR 40,000 on the balance sheet a few years later.
Current assets, by contrast, are meant to be turned into cash in the short term. Inventory will become sales, trade receivables will be collected, cash is already liquid. It is in these current assets that the working capital requirement is lodged: the money tied up while waiting for customers to pay. Current assets that swell faster than turnover are often the first sign of cash under strain.
- Fixed assets: tangible (buildings, machines), intangible (patents, goodwill), financial (holdings); worn out by depreciation.
- Current assets: inventory, trade receivables, cash; intended to be turned into cash within the year.
- Reading rule: assets are classified from the least liquid (at the top) to the most liquid (at the bottom).
Liabilities: how the company is financed
Liabilities answer one question: with what money were the assets paid for? Two major sources stand opposed here. Equity, the shareholders' money (capital contributed plus accumulated profits), which does not have to be repaid. Debt, the money of third parties (banks, suppliers, the State), which will have to be. The balance between these two sources measures the company's solidity.
Equity is the safety cushion. It groups share capital (the shareholders' initial contribution), reserves (the undistributed profits of past years) and the profit for the current year. The higher the equity, the more the company can absorb losses without threatening its survival: it belongs to the company and is not repaid. This is why a banker looks at this item first before granting a loan.
Debt is classified by maturity. Non-current liabilities (long-term bank loans) normally finance the top of the balance sheet, that is, fixed assets. Current liabilities (suppliers, tax and social debts, overdraft) finance the bottom of the balance sheet, current assets. A golden principle structures this reading: durable uses must be financed by durable resources. Financing a factory with a bank overdraft means exposing the company to the slightest tightening from its bank.
- Equity: capital, reserves, profit; not repaid, absorbs losses.
- Non-current liabilities: long-term loans, finance fixed assets.
- Current liabilities: suppliers, tax and social debts, overdraft.
- Golden rule: finance durable uses (top of the balance sheet) with durable resources.
The 4 ratios for reading a balance sheet
Four ratios are enough to diagnose a company's financial structure from its balance sheet. Two measure solidity (financial autonomy, gearing), one measures balance (net working capital), one measures liquidity (current ratio). Each is calculated in one line and interpreted in one sentence.
Never read these ratios in isolation: it is their overall coherence that draws the diagnosis. Comfortable financial autonomy but negative working capital reveals a company solid on paper but poorly structured in its short-term financing. Conversely, high indebtedness can be healthy if it finances profitable assets and remains covered by cash flows. The balance sheet gives the snapshot; these ratios bring it into focus.
- Financial autonomy = equity / balance sheet total. Measures independence from creditors. Above 33%, the structure is generally healthy; below 20%, dependence becomes a risk.
- Gearing = net financial debt / equity. Measures leverage. Above 1, debt exceeds equity and reduces room for manoeuvre in the event of a downturn.
- Net working capital = stable resources − fixed assets. Positive, durable resources cover the working tool and free up a cushion for the operating cycle; negative, it is a warning sign.
- Current ratio = current assets / current liabilities. Ability to meet near-term maturities. Below 1, the company does not cover its short-term debts with its short-term assets.
The warning signs in a balance sheet
A balance sheet speaks as much through its imbalances as through its figures. A few configurations should immediately raise the alarm, whether you are analysing a customer, a supplier, an acquisition target or your own company. Spotting them avoids many nasty surprises and makes it possible to act before the situation closes in.
The most serious signal is that of negative equity: accumulated losses have exceeded capital, and the company is worth less than nothing in accounting terms. In Belgium, this situation triggers an alarm bell procedure: when net assets fall below half of the capital, the administrative body must convene the general meeting to decide on continuity. It is a legal signal, not just a financial one.
Other imbalances deserve attention without being as dramatic. Persistently negative working capital (the company finances its fixed assets with short-term debt) makes it vulnerable to any withdrawal of credit. Systematically negative cash offset by an overdraft reflects a structural fragility. Finally, a trade receivables item that swells out of proportion to sales may conceal unprovisioned doubtful receivables, which overstate the real assets.
- Negative equity: losses greater than capital; in Belgium, alarm bell procedure as soon as net assets fall below half of the capital.
- Persistently negative working capital: fixed assets financed short term, vulnerability to withdrawal of credit.
- Chronic negative cash masked by an overdraft: structural financing fragility.
- Trade receivables swelling out of step with sales: risk of doubtful receivables overstating the assets.
Reading a Belgian balance sheet: annual accounts at the NBB
In Belgium, most companies file their annual accounts each year with the Central Balance Sheet Office of the National Bank (NBB). These accounts are public and can be consulted free of charge: a rare advantage for analysing a partner, a competitor or a customer before committing. You still have to know how to read the standardised Belgian format.
The filed accounts follow a standardised format (full for large companies, abridged or micro for the smaller ones), which makes comparisons possible from one company to another. The abridged format, the most common for SMEs, groups together certain items: some detail is lost, but the essentials of the diagnosis (equity, debt, asset-liability balance) remain legible. Each heading carries a standardised code, which makes it possible to retrieve equity, debt or profit mechanically.
Beware, however, of the pitfalls specific to Belgian accounts. For an SME in abridged format, the detailed income statement may be partly confidential: turnover is not always published, and one then reasons on gross margin. The shareholder current account, common in patrimonial structures, may appear among the debts whereas it is economically akin to equity. And a company without a recent filing should prompt caution. On these nuances, the free Sagora Analytics diagnosis sorts things out automatically from the NBB accounts.
Practical case: reading the balance sheet of an SME
Let us take a fictitious and purely illustrative SME to connect these notions. A services company based in Brussels, with a balance sheet total of EUR 1,000,000. The figures below are simplified assumptions intended to show the method, not a real case. The objective: to move from the raw balance sheet to a diagnosis in four ratios.
On the liabilities side, the company shows EUR 400,000 of equity, EUR 250,000 of long-term financial debt and EUR 350,000 of current liabilities (suppliers and tax debts). On the assets side, EUR 600,000 of fixed assets (premises and equipment) and EUR 400,000 of current assets (trade receivables and cash). The two columns balance nicely at EUR 1,000,000.
The diagnosis then unfolds in four steps. Financial autonomy comes out at 400,000 / 1,000,000 = 40%, comfortable. Gearing stands at 250,000 / 400,000 = 0.63, that is, controlled indebtedness. Net working capital (stable resources of EUR 650,000, that is, EUR 400,000 of equity plus EUR 250,000 of long-term debt, minus fixed assets of EUR 600,000) is positive at EUR 50,000: durable resources cover the working tool and leave a small cushion. The current ratio (current assets 400,000 / current liabilities 350,000) is 1.14: the company covers its near-term maturities.
Verdict: a healthy and balanced structure. Independent (40% autonomy), lightly indebted (gearing 0.63), correctly structured (positive working capital) and liquid (current ratio above 1). The same balance sheet with EUR 150,000 of equity, EUR 500,000 of long-term debt and negative working capital would tell the opposite story: a company under strain, dependent on its creditors. That is the full power of a structured balance sheet reading: moving from a page of figures to a diagnosis in four sentences.
- Balance sheet: fixed assets EUR 600,000, current assets EUR 400,000; equity EUR 400,000, long-term debt EUR 250,000, short-term debt EUR 350,000.
- Financial autonomy: 40% (comfortable).
- Gearing: 0.63 (controlled indebtedness).
- Net working capital: +EUR 50,000 (balanced structure).
- Current ratio: 1.14 (sufficient liquidity).