Balance Sheet vs. Income Statement

Investors look at several variables when assessing a stock. They look at a company’s valuation, sector trends, macroeconomic developments and other factors that can impact a stock’s value. However, few factors are as important as a company’s financials. A corporation’s financial performance sets it apart from other firms and gives investors a better understanding of the long-term investment opportunity. Balance sheets and income statements paint a picture of a company’s financial health. Knowing the differences between these important resources can help you make better decisions. 

What is a Balance Sheet?

A balance sheet is a financial document that gives investors an overview of a company’s assets, liabilities and shareholders’ equity. Balance sheets help investors understand a company’s financial stability and if it has enough cash to address short-term debt. 

Structure and Components of a Balance Sheet

Each balance sheet has a list of assets on the list and a list of liabilities on the right. Assets and liabilities are broken into short-term and long-term items. Short-term assets represent assets that can be converted into cash quickly, while short-term liabilities are debt obligations that are due within a year.

Long-term assets are resources that are more difficult to convert into cash, while long-term liabilities are due more than a year from now. The difference between total assets and total liabilities is shareholders’ equity. This position represents the amount of money invested in the company. Some corporations reinvest their money at the end of the year, a decision that increases shareholders’ equity. A higher shareholders’ equity translates into higher stock prices.

What is an Income Statement?

Income statements are financial documents that summarize a company’s top-line growth, bottom-line growth, and everything in between. Most income statements start with revenue on the top and then conclude with net income. Investors look at income statements to assess a company’s long-term financial sustainability. 

For instance, a company with rising net losses may have a challenge staying in business for much longer. These companies rely on investors and lenders to keep their doors open. A company with rising revenue and healthy profit margins has more staying power and can usually command a higher valuation.

Income statements break down individual expenses and highlight the profit margin. A company’s profit margin represents the percentage of revenue they keep after accounting for all expenses. 

Structure and Components of an Income Statement

An income statement contains several line items that give investors a better glimpse into a company’s financial performance. These are the key components.

• Revenue: The total cash a company receives through all of its sales. Companies with multiple revenue streams break this category into several sub-categories to reveal how individual business segments are performing.
• Cost of goods sold (COGS): The costs incurred for producing products that the company sold. Investors should see if the cost of goods sold rises at a faster pace than revenue.
• Operating expenses: Costs like rent and wages a business must incur to operate.
• Gross margin: The percentage of revenue a company keeps after accounting for the cost of goods sold. This is different from net profit margins, which reflect the percentage of revenue that gets converted into net profit.
• Net income/loss: The amount of money the company takes home or loses after all expenses.

Key Differences Between a Balance Sheet and an Income Statement

Balance sheets and income statements help investors make better decisions and gauge a company’s financial strength. Investors use balance sheets and income statements for fundamental analysis, a type of stock analysis. However, each of these documents has different information and structures.

Balance sheets focus on a company’s long-term financial position. The long-term assets and liabilities will remain intact for a while. Short-term assets and liabilities can go through some fluctuations. Balance sheets help investors learn more about assets, liabilities and shareholders’ equity. 

An income statement gives investors a glimpse into a company’s financial performance over a selected year or quarter. Media outlets often focus on year-over-year changes to revenue and earnings when covering earnings reports. Investors can find revenue, expenses and earnings in these documents.

Investors use income statements to assess if a company is profitable and growing. Balance sheets reveal if a company can keep up with its financial obligations. Investors get nervous about declining revenue and net losses on an income statement. Short-term liabilities exceeding short-term assets also concern investors.

These differences don’t necessarily make one document better than the other. It is a good idea to review balance sheets and income statements when assessing a company’s performance. 

Analyzing Financials

Analyzing a company’s financials can help you decide if it is a good investment. You should review a company’s financial documents before investing capital into its stock. Income statements and balance sheets change each quarter. The only constant is change, and investors should regularly monitor their largest positions. 

Frequently Asked Questions