This is the original lesson text as written at the time. Its examples, explanations and review questions are preserved and do not describe current market conditions.

Daily Economics, Business and Finance Study

September 23, 2026 (KST) · Day 4
Today's topic: The Balance Sheet as a Financial Health Check: Assets, Liabilities, Equity and Net Debt

1. Review of the previous lesson

On Day 3, we used the income statement to trace revenue through gross profit, operating income and net income. Today, we examine the balance sheet to see the accumulated position of profits, borrowings, cash and equipment at a particular date.

2. Today's core concepts

The income statement shows performance over a period: a flow statement. The balance sheet shows the financial position at a point in time: a statement of balances..

The fundamental balance-sheet equation is:

\[\text{Assets}=\text{Liabilities}+\text{Equity}\]

Assets: Resources controlled by the company that are expected to provide future economic benefits
Liabilities: Obligations the company must repay or fulfill in the future
Equity: The shareholders' book interest remaining after liabilities are deducted from assets

In stock investing, look beyond the size of assets and assess asset quality, debt repayment burdens and the stability of equity together.

3. Concepts explained

3-1. The balance sheet is a snapshot on a specific date

The income statement typically states a period such as:

From January 1, 2026 to December 31, 2026

The balance sheet instead shows balances on a specific date, such as:

As of December 31, 2026

Revenue and net income are therefore amounts generated over 1 year, whereas cash, inventories, borrowings and equity are balances remaining at the reporting date.

Failing to distinguish these can lead to incorrect comparisons.

Revenue: A flow over a period
Operating income: A flow over a period
Cash: A balance at a point in time
Borrowings: A balance at a point in time
Equity: A balance at a point in time

3-2. Assets: A company's economic resources

Assets are generally divided into current and non-current assets.

Current assets

Assets generally expected to be converted into cash within 1 year or used during the operating cycle.

Main items	Meaning	What to analyze
Cash and cash equivalents	Immediately available cash-like resources	Whether the cash is actually available or restricted
Short-term financial instruments	Short-term deposits and financial products	Maturities and redemption availability
Accounts receivable	Sales proceeds not yet collected from customers	Whether they are growing faster than revenue
Inventories	Inventory held for sale or production	Risk of weak sales or falling prices
Other current assets	Advances, prepaid expenses and other receivables	One-off nature and recoverability

More current assets are not always better. If difficult-to-collect receivables or unsold inventories rise, book assets can increase while financial health deteriorates.

Non-current assets

Assets used in operations over the long term or not expected to become cash within 1 year.

Main items	Meaning	What to analyze
Property, plant and equipment	Land, buildings, machinery, servers, factories and other tangible assets	Utilization, depreciation and additional investment needs
Intangible assets	Patents, software, customer relationships and other intangibles	Actual earning power and impairment risk
Goodwill	The portion of an acquisition price exceeding identifiable net assets	Acquisition performance and potential impairment losses
Long-term investments	Long-term holdings of stocks, bonds and other investments	Fair-value changes and liquidity
Right-of-use assets	Assets used under leases	Check the corresponding lease liabilities

Property, plant and equipment and inventories are especially important for semiconductor companies. Large capital expenditures can expand capacity, but insufficient demand can lead to low utilization, heavy depreciation and rising inventories.

3-3. Liabilities: Future payment or performance obligations

Liabilities are also divided into current and non-current liabilities.

Current liabilities

Obligations generally due for repayment or performance within 1 year.

Accounts payable
Short-term borrowings
Current portion of long-term borrowings
Other payables
Accrued expenses
Contract liabilities
Current income tax liabilities

Large current liabilities are not necessarily dangerous if cash and operating cash flow are sufficient. The problem is a large amount due soon with insufficient cash generation..

Non-current liabilities

Obligations generally due for repayment or performance after 1 year.

Long-term borrowings
Corporate bonds
Long-term lease liabilities
Retirement benefit obligations
Deferred tax liabilities
Long-term provisions

Long-term debt benefits from distant maturities, but also check interest rates, maturity concentrations, collateral and financial covenants.

3-4. Distinguish borrowings from operating liabilities

Not all liabilities are interest-bearing financial debt.

Borrowing-related liabilities: Bank loans, corporate bonds, commercial paper and some lease liabilities
Operating liabilities: Accounts payable, contract liabilities, accrued expenses and similar items

Accounts payable are amounts owed to suppliers, but are generally not treated like borrowings. Net debt is usually calculated primarily from interest-bearing debt.

\[\text{Net debt}=\text{Total debt}-\text{Cash and cash equivalents}\]

Depending on the analysis purpose, short-term financial instruments may be included in cash-like assets. If so, apply the same definition to every company being compared.

Positive net debt: Debt exceeds cash
Negative net debt: Cash exceeds debt, resulting in a net cash position

Net debt also connects to the enterprise value introduced on Day 2.

\[EV\approx\text{Market capitalization}+\text{Net debt}\]

Therefore, even with identical market capitalization, a company with more net debt has a larger EV, the value of the whole business.

3-5. Equity: Shareholders' book interest

The main components of equity include:

Share capital
Share premium
Retained earnings
Accumulated other comprehensive income
Other equity components
Non-controlling interests

The consolidated balance sheet may divide equity into:

Equity attributable to owners of the parent
Non-controlling interests

Retained earnings are not cash

Retained earnings are accumulated accounting profits from earlier periods that have not been distributed through dividends or similar transactions. These funds may already have been spent on factories, inventories or investments in subsidiaries.

Retained earnings of KRW 1 trillion therefore do not mean the company holds KRW 1 trillion in cash.

Treasury shares reduce equity

When a company repurchases its own shares, cash flows out and equity is reduced. Buybacks can increase value per share, but excessive purchases at overvalued prices or debt-funded buybacks can increase financial risk.

3-6. Book value differs from market capitalization

\[\text{Book equity}=\text{Assets}-\text{Liabilities}\]

\[\text{Market capitalization}=\text{Current share price}\times\text{Share count}\]

Book equity measures shareholders' interests under accounting standards, while market capitalization reflects the market's assessment of future profitability and risk.

PBR compares these two values.

\[PBR=\frac{\text{Market capitalization}}{\text{Common shareholders' equity}}\]

A PBR below 1 does not necessarily mean a price below liquidation value. Inventories or receivables may not be recoverable, and tangible assets may sell for less than their book value.

3-7. Basic measures of financial soundness

Current ratio

\[\text{Current ratio}=\frac{\text{Current assets}}{\text{Current liabilities}}\times100\]

This is a basic measure of short-term payment capacity. A higher ratio generally indicates greater short-term repayment capacity, but inspect the components because they may include inventories and doubtful receivables.

Working capital

\[\text{Net working capital}=\text{Current assets}-\text{Current liabilities}\]

A positive figure means short-term assets exceed short-term liabilities. Normal levels vary by industry, however. Companies paid by customers before paying suppliers can operate stably with negative working capital.

Liabilities-to-equity ratio

The ratio commonly called the debt ratio in Korea is:

\[\text{Liabilities-to-equity ratio}=\frac{\text{Total liabilities}}{\text{Equity}}\times100\]

A ratio of 150% means liabilities of 150 won for every 100 won of equity.

Net debt/EBITDA

\[\text{Net debt/EBITDA}=\frac{\text{Net debt}}{\text{Annual EBITDA}}\]

This shows net debt as a multiple of annual EBITDA under the simplifying assumption that current EBITDA continues. It does not represent the actual repayment period, because not all EBITDA is available for debt repayment.

4. A simple numerical example

The following is a Hypothetical educational balance sheet for manufacturing company A. Monetary amounts are in KRW 100 million units.

Assets

Item	Amount
Cash and cash equivalents	100
Accounts receivable	120
Inventories	180
Total current assets	400
Property, plant and equipment	500
Intangible and other assets	100
Total non-current assets	600
Total assets	1,000

Liabilities and equity

Item	Amount
Accounts payable and other operating liabilities	100
Short-term borrowings and current portion of long-term borrowings	150
Total current liabilities	250
Long-term borrowings and corporate bonds	250
Other non-current liabilities	100
Total non-current liabilities	350
Total liabilities	600
Shareholders' equity	400
Total liabilities and equity	1,000

The accounting equation holds as follows.

\[\text{Assets}\ 1,000=\text{Liabilities}\ 600+\text{Equity}\ 400\]

① Current ratio

\[\text{Current ratio}=400\div250\times100=160\%\]

Current assets are 1.6 times current liabilities. However, 180 out of 400 in current assets consists of inventory (units: KRW 100 million), so check whether it can be sold.

② Net working capital

\[\text{Net working capital}=400-250=150\text{ (KRW 100m)}\]

③ Liabilities-to-equity ratio

\[\text{Liabilities-to-equity ratio}=600\div400\times100=150\%\]

④ Net debt

Total debt is 400, consisting of short-term debt of 150 and long-term debt of 250 (units: KRW 100 million).

\[\text{Net debt}=400-100=300\text{ (KRW 100m)}\]

If annual EBITDA is 150 (KRW 100 million units):

\[\text{Net debt/EBITDA}=300\div150=2.0\text{x}\]

This figure alone cannot establish whether the company is risky. Also examine future EBITDA stability, interest rates, debt maturities, CapEx and FCF.

5. Practical use in stock and company analysis

① Look at net cash, not just cash

Even a company with KRW 1 trillion in cash has net debt of KRW 1 trillion if borrowings are KRW 2 trillion. Do not judge its financial structure as sound merely because it “has lots of cash.”

Check in this order.

Cash and cash equivalents
Short-term financial instruments
Short- and long-term borrowings
Corporate bonds
Lease liabilities
Cash restricted from use
Net cash or net debt

② Check whether receivables and inventories are growing faster than revenue

If revenue grows 10% but receivables rise 40%, cash collection may have slowed.

If revenue is flat but inventories rise 50%, possible causes include:

Slower demand
Overproduction
Lower selling prices
Accumulation of obsolete products
Future inventory write-downs

Semiconductor inventories are sensitive to industry conditions and price changes, so examine inventory growth and write-downs together.

③ View rising tangible assets as both an opportunity and a risk

An increase in property, plant and equipment may represent investment in factories, machinery or servers.

The positive path is:

\[\text{Higher CapEx}\rightarrow\text{More capacity}\rightarrow\text{Higher revenue}\rightarrow\text{More FCF}\]

The negative path is:

\[\text{Higher CapEx}\rightarrow\text{Oversupply and low utilization}\rightarrow\text{Depreciation burden}\rightarrow\text{Lower earnings and FCF}\]

Do not assume rising tangible assets necessarily represent productive growth investment. Check orders, demand, utilization and the revenue outlook together.

④ Examine the maturity structure, not just total debt

The same KRW 1 trillion of borrowings can carry different risks.

A: Repayments spread over the next 5 years
B: Most debt matures within the next 12 months

B faces greater refinancing risk. A high floating-rate debt share also means rising market rates feed into interest expense more quickly.

⑤ Check goodwill and intangible assets

Companies that make many acquisitions may carry substantial goodwill. If acquired businesses underperform, impairment losses may reduce net income and equity.

Therefore, examine:

Goodwill as a share of equity
Growth and profitability of acquired businesses
Recent impairment-test results
Past impairment losses

⑥ Connect the balance sheet with the income statement

Balance-sheet change	Possible impact on earnings and cash flow
Increase in receivables	Revenue recognized, but cash collection delayed
Increase in inventories	Cash tied up in inventories, with possible write-downs
Property, plant and equipment increases	Higher CapEx and future depreciation
Increase in borrowings	Cash inflow and higher future interest expense
Increase in retained earnings	Possible increase in accumulated net income
Increase in treasury shares	Lower cash and equity
Decrease in goodwill	Possible impairment loss

6. What to look for in disclosures

Korean companies: DART

Financial Supervisory Service DART In annual, half-year and quarterly reports, examine consolidated financial statements first. Check these.

Disclosure location	What to check
Consolidated balance sheet	Overall structure of assets, liabilities and equity
Cash and cash equivalents note	Composition of cash and restrictions on use
Accounts receivable note	Loss allowances, overdue balances and impairment
Inventory note	Raw materials, work in progress, finished goods and write-downs
Property, plant and equipment notes	Acquisitions, disposals, depreciation and construction in progress
Intangible assets and goodwill notes	Acquisition cost, amortization and impairment losses
Borrowings and bonds notes	Short- versus long-term classification, interest rates, maturities and collateral
Lease note	Right-of-use assets and lease liabilities
Equity note	Share count, treasury shares and retained earnings
Contingent liabilities and commitments note	Guarantees, litigation, purchase commitments and collateral
Related-party note	Loans, guarantees and transactions involving affiliated companies

For these three items, always read the notes rather than relying only on headline figures.

Cash actually restricted from use
Interest rates and maturities of borrowings
Potential impairment of inventories and receivables

US companies: 10-K and 10-Q

SEC EDGAR Check the following items there.

10-K Item 8 / 10-Q Part I, Item 1
- Consolidated Balance Sheets
- Notes to Consolidated Financial Statements
Cash and cash equivalents
Marketable securities
Accounts receivable
Inventories
Property, plant and equipment
Goodwill and intangible assets
Short-term debt and Long-term debt
Lease liabilities
Stockholders’ equity
Commitments and contingencies

In the debt notes, examine more than the total amount:

Fixed- and floating-rate proportions
Maturities by year
Weighted-average interest rate
Collateral and financial covenants
Unused credit facilities
Recent new borrowings and bond issues

Current share price and market capitalization are not balance-sheet items. Obtain them separately from an exchange or reliable market-data source for the same valuation date.

7. Key takeaways

The balance sheet shows assets, liabilities and equity at a point in time, and always satisfies Assets = Liabilities + Equity as an identity.
A large asset base may still be low quality if it contains substantial hard-to-collect receivables or inventories.
Not all liabilities are borrowings. Net debt is interest-bearing debt minus cash.
Retained earnings are accumulated accounting profits, not cash on hand.
Equity is book value, while market capitalization is market value.
Financial soundness requires examining cash, maturities, interest rates, FCF, collateral and covenants alongside total debt.
Changes in receivables, inventories, tangible assets and borrowings provide important clues to next quarter's earnings and cash flow.

8. Three review questions

Question 1

If total assets are 2,500 and total liabilities are 1,600 (units: KRW 100 million), what is equity?

Question 2

What is net debt for a company with cash of 300, short-term borrowings of 200 and long-term borrowings of 500 (units: KRW 100 million)?

Question 3

Two companies have the same total assets and equity. G's inventories and receivables are growing rapidly, while H's cash is increasing and borrowings are declining. All else equal, which company's financial position appears to be improving?

Answers and explanations

Answer 1

\[\text{Equity}=\text{Assets}-\text{Liabilities}=2,500-1,600=900\text{ (KRW 100m)}\]

Answer 2

Total borrowings are 700, comprising 200 plus 500 (units: KRW 100 million).

\[\text{Net debt}=700-300=400\text{ (KRW 100m)}\]

Answer 3

At first glance, Company H appears to have an improving financial position. Rising cash and declining borrowings may reduce net debt and the interest burden.

G may be experiencing normal working-capital growth as revenue expands. But if inventories and receivables grow faster than revenue, check for inventory accumulation and delayed collections.

Next lesson — Day 5:
“Why Is There No Cash Despite a Profit? Operating, Investing and Financing Cash Flows”