How to Read a Mining Company’s Balance Sheet

The balance sheet illustrates the financial picture of the company at a specific date, usually the closing day of the company’s financial year. Included are the corporation’s assets, liabilities and shareholders’ equity.

On one side of the balance sheet, the left in Canada and the U.S., are listed the company’s assets. Assets are anything that the company owns or has owing to it. They include current assets, such as cash, short-term securities, accounts receivable, inventories and prepaid taxes, and fixed assets, such as buildings, factories, machinery and equipment.

Note that fixed assets are sometimes referred to as “property, plant and equipment”. The normal method for valuation of these fixed assets is the cost minus the depreciation accumulated by the date of the balance sheet. Accountants regard depreciation as the decline in useful value of a fixed asset due to wear and tear from use over time.

The other side of the balance sheet shows liabilities and shareholders’ equity, or the net worth of the company, which represents the shareholders’ interest.

Liabilities are what the company owes others or, more specifically, all debts that fall due in the coming year and beyond. Included here are current liabilities, such as accounts payable, income tax payable and the amount of long-term debt paid off that year, and long-term liabilities, which are debts due after one year from the date of the financial report.

Long-term liabilities include not only long-term debts, but also deferred income taxes. This is income tax that would other wise be payable, but which is deferred by using certain deductions provided by the government. Any tax writeoffs in the early years of investment serve to reduce what the company would otherwise owe in current taxes.

Shareholders’ equity is the total equity interest that all stockholders have in the company. On the balance sheet, liabilities are subtracted from assets, and what remains is shareholders equity or ownership in the company. In this way, assets always equal liabilities plus shareholders’ equity. For legal and accounting reasons, it is usually separated into three categories:

• Capital stock, which are the shares representing ownership of the business, including preferred and common;
• Retained earnings, which are the after-tax profits over the life of the company after all expenses and dividends have been paid out; and
• Contributed surplus (some times called capital surplus), which is the amount raised by the sale of shares in excess of the par or market value of each share.

The balance sheet does not show how much revenue a company took in during the year. Nor does the balance sheet show the expenses incurred, how much profit was earned or loss incurred. This information is provided in the earnings statement.