What Is A Balance Sheet And Margin Of Safety

This lesson focuses on the balance sheet, equity of a business, margin of safety, and business value comparison. The lesson uses a small ice-cream business owned by Nancy as an example to demonstrate the importance of the balance sheet and how to determine the equity of a business. The balance sheet is a document that helps determine the margin of safety and equity of a business, and it provides an estimate of what the business is worth if it were to be liquidated.

Nancy’s business is worth $7,000 in equity, but she is asking for $200,000 to sell it, making the investment risky. The closer the equity is to the market price, the safer the investment. The lesson emphasizes the need for stock investors to become familiar with the income statement, balance sheet, and cash flow statement, which are the three main documents that corporations use to account for all their business operations.