AFM Analysis of Balance Sheet Part 2: Equity, Assets & Ratios

Jaiib afm balance sheet analysis — this guide gives you the latest 2026 information, key dates, eligibility, fees and study tips for the JAIIB exam.

Analysis of Balance Sheet (Part 2) — JAIIB AFM Study Notes

This article continues the detailed study of balance sheet analysis for the JAIIB Accounting and Financial Management for Bankers (AFM) paper. In Part 1. We covered the objectives of financial statement analysis, users of financial statements, the structure of the balance sheet, the meaning of financial statement analysis, and its typical components. In Part 2. We examine the three major sections of the balance sheet — Equity, Liabilities, and Assets — and discuss the key financial performance metrics derived from balance sheet analysis.

JAIIB is conducted twice a year by IIBF; visit iibf.org.in for the latest exam schedule.

Key Points

• A balance sheet has two sides: Equity and Liabilities (sources of funds) and Assets (use of funds).
• Equity represents the ownership stake of shareholders and includes share capital, paid-up capital, and retained earnings.
• Liabilities are classified as long-term (non-current) and short-term (current) based on their repayment period.
• Assets are classified as non-current (life greater than 1 year) and current (life less than 1 year); all fixed assets except land are subject to depreciation.
• Key financial performance metrics derived from the balance sheet include Liquidity, Efficiency, Leverage, and Rate of Return.

Structure of the Balance Sheet

To understand the balance sheet, we first need to understand its two-sided structure. A company's balance sheet has two main parts:

• Equity and Liabilities — Sources of funds (how the company's assets are financed)
• Assets — Use of funds (what the company owns or controls)

The elements of the balance sheet vary depending on the type of business. However, there are three basic categories: Assets, Liabilities, and Equity.

Proforma of a Balance Sheet

Section 1: Equity

Equity is another item on a company's balance sheet representing the share of shareholders — the owners of the company. Shareholders have a larger stake in the company than lenders. And their investments are riskier, which entitles them to greater rights (such as voting rights and residual claim on assets) in the company.

Equity is also known as net assets, i.e., Assets minus Liabilities.

The key components of the equity section of the balance sheet are:

Share Capital

There are two main types of share capital:

• Preference Share Capital: Preference shareholders have priority over ordinary shareholders. They receive dividend payments or a distribution of assets before equity shareholders in certain events such as liquidation of the company.
• Equity Share Capital: Ordinary shares representing residual ownership of the company. Equity shareholders bear the highest risk and receive dividends only after preference shareholders.

Paid-up Capital

Paid-up share capital refers to the portion of the face value of shares actually paid by shareholders in exchange for shares in the company. It is the amount of money actually received by the company from shareholders against the nominal or face value of shares issued.

Retained Earnings

This figure shows the company's cumulative net profit retained in the business after dividends have been paid to shareholders. It represents reinvestment of profits back into the company for future growth.

Reserves and Surplus

Some other important components of the equity section include:

• Undistributed profit (Retained Earnings): The portion of net profit not distributed to shareholders as dividends.
• Capital Reserve: Part of retained earnings set aside for future investment in fixed assets or to absorb capital losses.
• Securities Premium: The amount received over and above the face value of shares when shares are issued at a premium.

Key highlights of equity:

• Equity gives its holders an ownership stake in a company. It is initially contributed by the founders or promoters of the company.
• Promoters then sell some shares to investors or to the general public through stock exchanges to raise additional funds. These shares are sold at a premium over the original face value.

Section 2: Liabilities

Understanding what a company owes is one of the starting points of balance sheet analysis. All outstanding financial obligations that a company has are its liabilities. Liabilities are broadly classified into non-current (long-term) and current (short-term) liabilities.

Non-Current (Long-term) Liabilities

Long-term liabilities mostly include debt that the company has raised for long-term usage, i.e., repayable in a period greater than 1 year. Examples include:

• Long-term bank loans
• Debentures and bonds
• Long-term deposits from public

Current Liabilities

Current liabilities include obligations that fall due within 12 months. They include the following:

• Short-term debt: Funds borrowed for a period less than 1 year, plus the current portion of long-term debt due within 1 year, and repayments of deposits or bonds due within one year.
• Sundry Creditors: The amount to be paid to suppliers for materials or services supplied on credit.
• Accrued Liabilities: Services or goods for which the company has already been paid but not yet delivered — e.g., advance received from customers.
• Deposit received (refundable security deposits due within 1 year)
• Dividend payable to shareholders
• Duties and taxes payable
• Any other liability due within the next 12 months

Section 3: Assets

Assets are the heart of a business and take most of the analyst's time during balance sheet analysis. Anything a company owns — whether tangible or intangible — that can generate income in the future is an asset.

The assets side shows what the company owns; the liabilities side shows what the company owes. Both assets and liabilities can be either non-current (long-term) or current (short-term).

Non-Current Assets

Non-current assets remain with the company for more than 1 year. Examples include plant and machinery, land and buildings, furniture, vehicles, and intangible assets. These are also called Fixed Assets.

Accounting Standards require property to be recognised as an asset only if its value can be measured reliably and if it can be sold separately.

All fixed assets, except land, lose value over time. This loss in value is called depreciation, which is reported as an expense on the income statement each year. The value at which a fixed asset is recorded on the balance sheet = purchase price less total depreciation charged till the balance sheet date (also called Written Down Value or WDV).

Companies also own Intangible Assets — such as patents. Copyrights, and trademarks — that cannot be physically touched but generate income and can be reliably valued and sold separately. For intangible assets, the annual reduction in value is called amortisation. It is treated identically to depreciation and is charged to the Profit and Loss Statement each year.

Current Assets

Current assets are those that the company expects to convert to cash or use within 1 year. They include:

• Cash and Cash Equivalents: Cash in hand and cash at bank; also short-term investments in financial products such as commercial papers, certificates of deposit (CDs), and T-bills.
• Inventory: Unsold finished goods, raw materials, and work-in-progress (semi-finished goods). Inventory is NOT depreciated.
• Accounts Receivable (Sundry Debtors): The amount the company is yet to receive for goods sold on credit.
• Loans and Advances: Short-term loans and advances made to suppliers, employees, or group companies, expected to be recovered within a year.

Key Financial Performance Metrics from Balance Sheet Analysis

The balance sheet is a very important financial statement. It can be viewed on its own or in conjunction with the income statement and cash flow statement to get a complete picture of the company's financial health. There are 4 important financial performance metrics that are measured using balance sheet analysis:

1. Liquidity

Liquidity is the ability of a company to meet its short-term obligations. It is determined by comparing the current assets of a company with its current liabilities. For a company to cover its short-term liabilities, current assets should be greater than current liabilities.

• Current Ratio = Current Assets / Current Liabilities (ideal ratio is 2:1)
• Quick Ratio (Acid Test) = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities (ideal ratio is 1:1)

2. Efficiency

A company's efficiency can be determined by comparing the income statement with the balance sheet. Key efficiency ratios include:

• Asset Turnover Ratio = Revenue / Average Total Assets — indicates how efficiently the company uses its assets to generate revenue.
• Working Capital Cycle (Operating Cycle) — indicates how well a company manages its short-term money and converts current assets into cash.

3. Leverage

By examining how a company is financed, we can determine how much financial leverage it has and what financial risks it is taking. Higher leverage means higher financial risk. Key leverage ratios include:

• Debt-to-Equity Ratio = Total Debt / Total Equity
• Debt-to-Total Assets Ratio = Total Debt / Total Assets

4. Rate of Return

In order to evaluate the profitability of a company, one must analyse the balance sheet alongside the income statement. Key profitability ratios include:

• Return on Equity (ROE) = Net Income / Shareholders' Equity
• Return on Assets (ROA) = Net Income / Total Assets
• Return on Invested Capital (ROIC) = Net Income / (Debt + Equity)

Thus. The balance sheet is the most important source of information about a company's financial health, and knowing how to analyse one is one of the most critical skills for a banker.

Summary: Balance Sheet Analysis Checklist for Bankers

FAQ: Analysis of Balance Sheet Part 2 (JAIIB AFM)

Q1. What is the difference between equity and liabilities on a balance sheet?

Liabilities represent money owed to external parties — lenders, suppliers, and creditors — that must be repaid. Equity represents the owners' claim on the company's assets after all liabilities are paid. Equity = Total Assets - Total Liabilities. Liabilities holders are creditors; equity holders are owners.

Q2. What is the difference between preference shares and equity shares?

Preference shareholders have priority over equity shareholders in receiving dividends and in the distribution of assets upon liquidation. However, preference shareholders typically do not have voting rights. Equity shareholders bear more risk but have full voting rights and receive the residual income after preference dividends are paid.

Q3. What is depreciation and why is land not depreciated?

Depreciation is the systematic reduction in the book value of a fixed asset over its useful life. Reflecting wear and tear, obsolescence, or passage of time. Land is not depreciated because it has an indefinite useful life — it does not wear out or become obsolete. And in most cases, its value tends to increase over time.

Q4. What is the difference between depreciation and amortisation?

Depreciation is the reduction in value of tangible fixed assets (such as machinery, furniture, and vehicles) over their useful life. Amortisation is the equivalent process for intangible assets (such as patents, trademarks, and copyrights). Both are non-cash expenses charged to the Profit and Loss Statement annually.

Q5. How does a bank use balance sheet analysis for credit decisions?

A bank analyses a borrower's balance sheet to assess liquidity (can the borrower service short-term debt?). Solvency (can the borrower repay long-term debt?), leverage (is the company too heavily indebted?), and profitability (is the business generating sufficient returns?). The bank typically looks at at least 3 years of financial statements, analyses trends, and computes key financial ratios before making a credit decision.

Conclusion

A thorough understanding of balance sheet analysis — covering equity components. The classification of liabilities and assets, and the derivation of liquidity, efficiency, leverage, and return ratios — is essential for JAIIB AFM candidates. This knowledge is directly applicable in day-to-day banking work, particularly in credit appraisal, loan sanctioning, and monitoring of borrower accounts. For the official JAIIB exam schedule and syllabus, visit iibf.org.in.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

For more on jaiib afm balance sheet analysis, see the official IIBF circulars and our chapter-wise free notes on iibf.store.

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Source: Indian Institute of Banking & Finance — iibf.org.in