How to Read a Balance Sheet Like an Investor (Not an Accountant)

How to Read a Balance Sheet Like an Investor — A Practical Guide for Singapore Investors

A calm, step-by-step framework to assess financial strength, debt risk, liquidity, and “hidden” balance sheet red flags — without accounting jargon.

Published: 15 November 2025  |  Category: Investor Education / Balance Sheet Analysis

Key Takeaways (If You Only Have 30 Seconds)

• The balance sheet is a financial health report — it tells you who can survive a downturn.
• Start with the big picture: liquidity (cash), leverage (debt), and working capital signals.
• Debt risk is often the real risk — profit can look fine until refinancing becomes hard.
• Receivables and inventory are common places where weak businesses “hide” problems early.
• Be extra skeptical of “other assets” and large goodwill — these can be balance sheet “black boxes”.
• Always interpret assets in context: capital-intensive vs asset-light businesses behave very differently.
• Use a simple checklist so you stay objective — the goal is risk control, not perfection.

Contents

1. Big Picture — Assets vs Liabilities (The 30-second health check)
2. Cash — The Company’s Lifeline
3. Debt — The True Source of Financial Risk
4. Trade Receivables — A Silent Red Flag
5. Inventory — The Pulse of Demand
6. Property, Plant & Equipment — Know the Business Type
7. Intangibles & Goodwill — Handle With Caution
8. Other Assets — Spot the “Black Box”
9. Payables & Working Capital — Short-term Health
10. Equity — What It Really Represents
11. My Simple Balance Sheet Checklist (Copy This)
12. My Overall Take as an Accounting-Trained Investor
13. FAQ — Balance Sheet Analysis for SGX Investors

1. Big Picture — What Do Assets vs Liabilities Tell You?

For many investors, the balance sheet feels like the most intimidating part of the financial statements. But if you strip away the jargon, it is simply a snapshot of: what the company owns, what it owes, and how financially resilient it is.

Before diving into line items, I always ask one high-level question: Is this a strong balance sheet or a weak one?

A strong balance sheet often looks like:

• More assets than liabilities (with reasonable asset quality),
• Plenty of cash (or at least good liquidity),
• Moderate or low debt,
• Stable working capital (receivables/inventory not ballooning).

A weak balance sheet often looks like:

• High short-term debt and low cash reserves,
• Rising receivables and ballooning inventory,
• Large “other receivables / other assets” with unclear explanation,
• Heavy dependence on refinancing to stay afloat.

Explaining it like you’re 11:

Think of a balance sheet like your “money safety report”. It shows your savings, what you own, and what you owe. A kid with some savings and little debt sleeps well. A kid with no savings and lots of IOUs worries every month.

Analyst insight:

• Balance sheets often reveal risk before the income statement does.
• Most “blow-ups” are not caused by low profit — they are caused by liquidity stress and debt.
• For SGX investors, this is especially important in cyclical sectors and smaller companies where funding access can tighten fast.

2. Cash & Cash Equivalents — The Company’s Lifeline

Cash is the single most important asset for risk management. Strong cash reserves give management options during difficult periods.

A company with healthy cash can:

• Handle downturns without panic actions,
• Delay borrowing (or negotiate better rates),
• Fund working capital and day-to-day operations,
• Invest in opportunities when competitors are weak,
• Maintain higher dividend safety (if business cash flows are stable).

Two cash patterns I watch closely:

• Cash consistently falling — often a symptom of weak operating cash flow, rising working capital needs, or heavy interest/debt repayment.
• Cash rising without profit rising — can be fine, but often comes from one-offs like asset disposals, grants or tax rebates.

Explaining it like you’re 11:

Cash is like the water bottle you bring to a long hike. If you have enough, you can keep walking calmly. If you run out, you might still be “fit” — but you can collapse quickly.

Analyst insight:

• Ask: Is cash movement supported by real business activity?
• Check whether falling cash matches rising receivables or inventory (a common hidden drain).
• For dividend investors, cash matters — but recurring operating cash flow matters even more.

3. Debt — The True Source of Financial Risk

Many investors focus on profit and ignore debt. But debt often determines whether a company can survive a tough cycle — and whether dividends stay intact.

Debt affects:

• Survival in crises,
• Dividend sustainability,
• Vulnerability to rising interest rates,
• Ability to grow without dilution,
• Overall financial stability.

What I check (in simple sequence):

• Total debt (short-term vs long-term) — rising short-term borrowings can signal liquidity pressure.
• Net debt = Total debt − Cash — gives a clearer “true burden” picture than debt alone.
• Gearing = Total debt ÷ Equity — rising gearing usually means rising risk.
• Interest coverage = EBIT ÷ Interest expense — if it gets too low, interest can destroy profits quickly.

Explaining it like you’re 11:

Debt is like borrowing money for a bike. If you borrow a little and can pay it back easily, it’s okay. If you borrow too much, every month you pay “interest” and you have less money left for everything else.

Analyst insight:

• High leverage can look “fine” during good years — then become deadly when cash flow dips or refinancing tightens.
• Watch the split between short-term vs long-term debt; short-term refinancing risk is a common SGX pain point.
• For REITs, gearing discipline can make or break distributions — the balance sheet is the investment case.

4. Trade Receivables — One of the Most Important Red Flags

Receivables tell you whether customers are paying on time. They often reveal stress early.

My red-flag checklist:

• Receivables rising faster than revenue — could mean slower customer payments or weaker credit control.
• Large receivables concentrated in a few customers — concentration risk (if disclosed).
• A spike after an “excellent quarter” — sometimes growth was achieved by extending generous credit, not real demand.

Explaining it like you’re 11:

Receivables are like your friends who promised to pay you back. If the “IOU pile” keeps getting bigger, you may look rich on paper, but you can’t buy anything with promises.

Analyst insight:

• Receivables rarely lie: they often deteriorate before profit does.
• Fast growth plus rising receivables can be a warning of “growth without cash”.
• If the company later reports impairments, it confirms the receivables were not high quality.

5. Inventory — The Pulse of Demand

Inventory helps you judge whether a company is selling what it produces. For retailers and manufacturers, inventory quality can determine survival.

Healthy inventory often means:

• Inventory moves in line with revenue growth,
• Seasonal patterns are predictable,
• Write-downs are not frequent or unusually large.

Inventory red flags include:

• Inventory rising while sales stagnate,
• Slow-moving or obsolete stock,
• Large inventory impairments,
• Stock built ahead of demand that never materialises.

Explaining it like you’re 11:

Inventory is like snacks you bought to sell at a school event. If they don’t sell, they expire — and you lose money.

Analyst insight:

• Inventory problems often show up as: falling cash, rising storage costs, and eventual write-downs.
• Always cross-check inventory trends against revenue and gross margin.
• In some sectors, “inventory build” can be strategic — but management must explain it clearly.

6. Property, Plant & Equipment (PPE) — Understand the Business Type

Not all assets behave the same. A capital-intensive business usually needs constant reinvestment just to stay competitive.

Capital-intensive examples:

• Airlines, transport operators, construction, oil & gas, manufacturing.

These often require significant ongoing capex. Depreciation is an accounting expense — but the real cash outflow is often capex.

Asset-light examples:

• Software, services, consulting, education.

These can produce steadier free cash flow because they are not forced to spend heavily on physical assets.

Explaining it like you’re 11:

Some businesses need expensive “machines” to make money, like a factory. Others need mostly people and computers. The first group must keep buying and fixing machines to survive.

Analyst insight:

• Ask: How much cash is needed to maintain these assets?
• Capital intensity affects dividend safety: high capex can quietly starve free cash flow.
• When comparing companies, always compare “business type” first — not just accounting ratios.

7. Intangibles & Goodwill — Handle With Caution

Goodwill typically rises when a company buys another business at a price higher than the fair value of the acquired net assets. Goodwill itself is not automatically “bad”, but it deserves attention.

Common warning patterns:

• Large goodwill balances — can signal aggressive acquisition history.
• Rising goodwill + falling cash — may imply overpayment or poor integration.
• Impairments — a sign that the acquired business underperformed versus expectations.

A simple rule-of-thumb: if goodwill becomes a very large share of total assets (for example, more than half), I pay very close attention.

Explaining it like you’re 11:

Goodwill is like paying extra for a popular shop because you believe it will earn more in the future. If it doesn’t, you later admit, “I paid too much.”

Analyst insight:

• Goodwill is not cash. It cannot pay dividends. It cannot pay debt.
• Acquisitions can create value — but repeated impairments usually signal weak capital allocation.
• When goodwill is large, read management’s acquisition rationale and track post-deal performance closely.

8. Other Assets — Look for the “Black Box”

“Other receivables”, “other current assets”, “other non-current assets” can be perfectly legitimate — but they can also become a balance sheet black box.

These lines often hide:

• Loans to outsiders,
• Deposits with suppliers,
• Advances to related parties,
• Prepaid expenses,
• Assets with unclear value or recoverability.

If these items keep growing without clear explanation, I become cautious.

Explaining it like you’re 11:

“Other assets” is like writing “miscellaneous” on your spending list. Sometimes it’s fine. But if “miscellaneous” becomes the biggest item, something is off.

Analyst insight:

• Look for clear disclosures in notes and announcements — vague explanations deserve skepticism.
• Growing “other receivables” can later become impairments, which hit profit and equity.
• This is a common area where poor governance shows up early.

9. Payables & Working Capital — The Company’s Short-Term Health

Payables represent supplier credit. A moderate level is normal. But unusual changes can signal stress or shifting bargaining power.

Two patterns to watch:

• Payables rising sharply — the company may be delaying payments (possible cash flow stress).
• Payables falling sharply — suppliers may be forcing earlier payments (also a stress signal).

Always compare receivables, inventory, and payables together. That triangle explains most working capital stories.

Explaining it like you’re 11:

Payables are like the money you still owe the school bookshop. If you suddenly take much longer to pay, it might mean you’re short of cash.

Analyst insight:

• Working capital swings can quietly drain cash even when profit looks stable.
• If the company is paying suppliers faster while customers pay slower, liquidity can tighten quickly.
• In SGX small/mid caps, this pattern often appears before a fundraising or debt renegotiation.

10. Equity — Understand What It Really Represents

Equity is what remains for shareholders after subtracting liabilities from assets. Over time, it tells you whether the company is compounding value or eroding it.

Equity typically grows through:

• Retained earnings (profits kept in the business),
• Share issuance,
• Revaluation gains (in some asset-heavy businesses).

Declining equity can signal:

• Accumulated losses,
• Heavy impairments / write-downs,
• Dividends exceeding generated profits over time.

Explaining it like you’re 11:

Equity is like your “net worth”. If you own a phone worth $300 and you owe $100, your net worth is $200. If your net worth keeps shrinking, something is going wrong.

Analyst insight:

• Equity growth is meaningful only if asset quality is real and cash flows support it.
• Repeated dilution (share issuance) can keep equity stable while shareholder value per share declines.
• Long-term investors should monitor equity trends together with cash flow and returns on capital.

11. My Simple Balance Sheet Checklist (Copy This)

Before I invest, I run a simple 10-step test. It keeps me objective and prevents me from “falling in love” with a story.

1. Does the company have sufficient cash (or clear liquidity)?
2. Is debt manageable — and not rising too quickly?
3. Are receivables growing faster than revenue?
4. Is inventory aligned with demand?
5. Are “other assets” large or growing without clear explanation?
6. Is goodwill too large relative to total assets?
7. Is the business capital-intensive (and does it have the cash to sustain capex)?
8. Are payables behaving normally — or showing stress signals?
9. Is equity stable or growing for the right reasons?
10. If revenue drops for a year, can the company survive on this balance sheet alone?

Analyst insight:

• This checklist is not about finding “perfect” companies — it is about avoiding the fragile ones.
• If a company fails several tests, I either avoid it or require a bigger margin of safety.

12. My Overall Take as an Accounting-Trained Investor

Explaining it like you’re 11:

A company can look “successful” today, but if it has no cash and too much debt, it can get into trouble fast. The balance sheet tells you who is strong enough to keep going when things get hard.

My professional summary (calm and practical):

• What matters most: liquidity (cash), leverage (debt), and working capital quality (receivables/inventory/payables).
• What to be skeptical about: large “other assets”, big goodwill, and unexplained movements quarter to quarter.
• How this improves decision-making: it helps you avoid companies that can be forced into dilution or distress financing.
• Why consistency beats prediction: over time, strong balance sheets compound. Weak ones eventually face a hard reset.

13. FAQ — Balance Sheet Analysis for SGX Investors

Q1. What is the most important balance sheet line to start with?

Cash (and overall liquidity). It determines how long a company can survive if the business hits a bad period.

Q2. How do analysts spot red flags early?

They watch for mismatches: receivables rising faster than revenue, inventory rising while sales slow, and debt rising while cash falls. These patterns often appear before profits collapse.

Q3. Can dividends be misleading?

Yes. A high dividend can be funded by borrowing or by shrinking cash reserves. Dividend sustainability depends on recurring cash flow and balance sheet resilience.

Q4. How often should I review the balance sheet?

At minimum: every results season (quarterly/half-year/full-year). For higher-risk companies, I prefer checking balance sheet trends more regularly.

Q5. Is this framework suitable for REITs?

Yes — and arguably even more important. For REITs, gearing, refinancing profile, and interest costs are core drivers of distribution safety.

About the Author

The Accounting Investor (HenryT) is a Fellow Chartered Accountant (FCA) based in Singapore. He combines professional accounting training, corporate finance experience and personal dividend investing to help everyday investors read financial statements with confidence.

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Disclaimer

This article is for education and general information only. It does not constitute investment, legal, tax or any other form of professional advice, and it is not a recommendation to buy, sell or hold any securities mentioned.

My sole intent is to help readers learn how to read financial statements and think more clearly about businesses. Please do your own research or consult a licensed financial adviser before making any investment decisions. I may or may not hold positions in the securities discussed at the time of writing and am under no obligation to update this article.