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# Balance sheet

[toc]

## How the Balance sheet is made even?

When you estimate Balance sheet for current and future years, it is very usual that the bottom lines do not equal. You do not, however need to correct the imbalance yourself; the model makes it for you.

Let us see how the correction is made in both situations, i.e when assets are bigger or when liabilities are bigger.

### 1. Assets are estimated to be bigger

There are three parameters that you have to input:
1.    Minimum level of interest bearing long-term liabilities
2.    Minimum level of interest bearing current liabilities
3.    Share of debt allocated to long-term (interest bearing) liabilities

You may also leave the first two parameters to be zero. In this case the company do not necessary have any interest bearing debt at all. If you leave the third parameter to zero, all the generated debt are allocated to interest bearing current liabilities.
At first, the model calculates the difference of assets and liabilities. In this phase your minimum level requirements have already been taken into account. Then the model simply allocates the balance sheet differences to long-term and current liabilities according to what you have determined the share to be.

Here is an example what happens when assets are estimated to be bigger. You do not actually see this happening, it is just the logic behind the model.

### 2. Liabilities are estimated to be bigger

When liabilities are bigger than assets, the process is simpler. The balance sheet difference is totally allocated to Generated interest bearing financial assets. They are an item in Total financial assets.

Here is an example what happens when assets are estimated to be bigger. You do not actually see this happening, it is just the logic behind the model.

### 3. What happens when the situation changes?

Let’s say that first the assets are estimated to be bigger and the model has allocated the balance sheet differences to long-term and current liabilities like in example one. Then the profitability decreases rapidly and the estimates will be adjusted downwards. What happens in this situation:

The model will first reverse the adjustment it has made before, so basically opposite of the example number one will happen. While the cash generated will decrease, also the generated debt will decrease. If the model still cannot find balance with these operations, it will continue to add Generated interest bearing financial assets. The model will continue this until the balance sheet is again even.

In the opposite situation the liabilities are first estimated to be bigger, but then assets grow bigger for some reason. Again the model will first reverse the adjustments made before: It will decrease the debt to the minimum level (set by the analyst) and only after will start generating cash.

## Parameter allocation – Balance sheet liabilities

### Usage instructions and tips

1. If you have any doubts about any item, you can always ask from us. Very often a parameter with same name should be allocated to different item depending on company and situation. I.e., even though there are many common rules, there are many situations that have to be solved case-by-case.
2. Sometimes it is difficult to say only based on balance sheet information how to handle an item. In these cases Notes to financial statements may tell you the answer.
3. Size matters, especially relative size. It is not very relevant where to put 10 millions in the balance sheet if it totals to 10 billions. So the bigger the item, the more it has relevance and more you should consider it.

## Company does not tell the share of interest bearing debt

#### Case

A company reports long-term and short-term debt, but not how they are divided into interest and non-interest bearing debt.
Solution

Even though there would be no information about the interest bearing debt in the balance sheet, the company usually tells the total interest bearing debt or the net debt in the texts of interim report or fiscal year announcement. Using these parameters you are able to estimate the needed values. So you should search (Ctrl+F) for these terms in the text.

#### Long-term debt

If you get the net debt figure, simply add cash & equivalents (from the assets’ side) to it in order to have total interest bearing liabilities.

Interest bearing debt = Net debt + Cash & cash equivalents

Then it is reasonable to assume that all the long-term liabilities are interest bearing. And what remains from them, can be allocated to short-term debt.

Short-term debt = Interest bearing debt – Long-term debt

On the other hand, you may directly find total interest bearing debt. Again, assume that all long-term debt is interest bearing and allocate the rest to the short-term debt.

#### Short-term liabilities

The part of total short-term debt that is thus not allocated to short-term interest bearing debt can be allocated to short-term non-interest bearing liabilities.

This allocation would perhaps not be exactly true, but it is fair enough because the most important thing is that total interest bearing debt is correct even though the allocation of them to short-term and long-term would be a bit inaccurate.

#### Detailed information in notes

Often the more detailed information can be found from “notes to the financial statements” which can be found from the annual report only. Thus normally from late January up till mid-March there is only rough information available from the balance sheet items and the analyst has to do some assumptions, which can be later on refined with annual report information.

## Parameter allocation – Assets

### Usage instructions and tips

1. If you have any doubts about any item, you can always ask from us. Very often a parameter with same name should be allocated to different item depending on company and situation. I.e., even though there are many common rules, there are many situations that have to be solved case-by-case.
2. Sometimes it is difficult to say only based on balance sheet information how to handle an item. In these cases Notes to financial statements may tell you the answer.
3. Size matters, especially relative size. It is not very relevant where to put 10 millions in the balance sheet if it totals to 10 billions. So the bigger the item, the more it has relevance and more you should consider it.