Many companies actually don’t explicitly post Total Liabilities on their balance sheets. It’s kind of deceiving and can be a disservice to novice investors. Especially since some of the most important ratios I talk about like Debt to Equity implement Total Liabilities.
Here’s a great question from one of my Value Trap Indicator package clients:
“I’m 21 years old and am looking to buy stocks and build my investment portfolio. I’ve recently purchased the Value Trap Indicator book, and am reading through it now! It’s definitely an easy to understand book that simplifies the stock market into digestible terms.
I’m having trouble with one thing in particular,
When calculating the P/B ratio, it uses the Book Value = Total Assets – Total Liabilities.
When calculating the Debt to Equity Ratio, it divides Total Liabilities by Shareholders Equity.
I’ve attached Honeywell (HON)’s financial statement, and I’m confused as to whether to use “Total Current Liabilities” or “Total liabilities, redeemable noncontrolling interest and shareowners’ equity”. Which do I use for each ratio? What’s the difference?”
Use total assets and total liabilities. You’ll know that you’re using the right number for total liabilities because Total Assets minus Total Liabilities is always equal to shareholder’s equity.
In this case, the total assets and total liabilities would both equal $49,316 million. If these values were used wouldn’t this mean that the book value and shareholder equity would be zero? However, shareholder equity in the balance sheet is actually $18,418 mil. Would total current liabilities ($18,371 mil) be used instead? This would only be the current ones though, and still doesn’t equal shareholder equity…
Total assets is the number at the bottom, $49k. “Total liabilities, redeemable noncontrolling interest and shareowners’ equity” is their fancy way of saying total assets. We can logically confirm this since we know that total liabilities + shareholder’s equity is total assets.
That’s why I use an automatic formula calculator in my VTI spreadsheet. I input total assets and shareholder’s equity and it calculates the total liabilities for me. So when I’m analyzing a company’s balance sheet, I only need the bottom two values.
Shareholder equity is book value. Don’t worry about current liabilities at all when calculating debt to equity or book value.