The Rules of Wealth, 4th Edition

RULE 82

Know why you should be able to read a balance sheet – and how

If you are going to run a company or invest in companies, you need to be able to read a balance sheet. This is different to knowing what profit or loss a company has made (i.e. reading a profit and loss account). Why? Because a profit and loss account only shows you half the picture.

For instance, Company X might have a turnover of 1 million and expenses of 500,000, thus it has made a profit of 500,000 and must be doing really well, n’est-ce pas? No, actually. Because what you can’t see from this simple profit and loss account is that it owes the bank 2 million, the 1 million in turnover is very dodgy and there is a 4 million tax bill hanging over its head from previous years’ ...