3. What is a Balance Sheet & Margin of Safety

Understand the importance of a balance sheet

Income Statement, used to find the company profit, details out the net income or earnings.

On the other hand, we can use the balance sheet to determine the margin of safety that you'd get if you were to purchase the business.

To understand the concept of balance sheet, ask this question: what would happen if the business would liquidate right now?

How to determine the equity of a business

Equity (Book Value in share) == Total assets - Total liabilities

Understand a company's margin of safety

If Nancy couldn't find a buyer, how much is her business worth? She wants $200,000 for a company that is only worth $7,000 in equity. This difference == risk.

The closer the equity is to the market price, the safer the investment. In this case the equity is 3.5% of the market price. This means the margin of safety is very low.

Business value - A comparison of Net Income and Equity

• Net Income: Profit
• Equity: money you'd get if you liquidate your business