Balance sheet analysis is the evaluation of the structure of a company’s balance sheet and the nature and value of its assets, liabilities and equity, typically over two or more accounting periods.  The balance sheet reports the financial position of the company at the end of an accounting period by presenting the major categories and value of its assets, liabilities and shareholders’ equity on the balance sheet date.  It shows the relationship between a firm’s resources (assets) and the sources of these resources (liabilities and owners’ equity), where its reported total book value is the value of its total assets:

Total Assets = Total Liabilities + Owners’ Equity

A firm’s capitalization is obtained from debt and equity.  The total amount of owners’ equity and long-term funded debt invested in a company represents the firm’s capital structure.  A firm’s capital structure is distinguished from its financial structure, which includes all sources of funds, including such current liabilities as accounts payable and short-term debt in addition to long-term debt.

Capital Structure of a Real Estate Project (Example)
Instrument Proportion Relative
Yield		 Relative
Risk
Common Equity 5%-10% Highest Highest
Preferred Equity 5%-20% ↓ ↓
Mezzanine Debt 10%-20% ↓ ↓
Senior Debt 65%-85% Lowest Lowest

In determining total debt, current maturities of long-term debt, commercial paper and other short-term borrowings, amounts for operating lease debt equivalent and debt associated with accounts receivable sales/securitization programs are commonly included.  Operating debt (e.g., payables and deferred income) is frequently excluded in determining total debt, since it is part of a firm’s normal operations and, therefore, does not reflect the firm’s external financing decisions.  However, many analysts include all liabilities in their definition of debt.

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