Balance Sheet Check (Simple Rule)

You do not need to be an accountant to avoid losing money at NSE.

A simple balance sheet check can protect you from total capital loss, especially when dealing with penny stocks.

1. What a Balance Sheet Really Tells You

A balance sheet answers one critical question:

If this company collapsed today, would shareholders get paid — or wiped out?

Every balance sheet has three main parts:

A. Assets – What the Company Owns

Cash and bank balances
Buildings, land, machinery
Inventory
Money owed to the company (receivables)

👉 Assets are what can be sold to raise money.

B. Liabilities – What the Company Owes

Bank loans
Corporate bonds
Supplier debts
Taxes
Staff obligations

👉 Liabilities are paid first.

C. Shareholder Equity – What Belongs to Shareholders

Paid-up capital
Retained earnings
Reserves

👉 Equity is what remains after all debts are paid.

2. The Golden Formula (Never Changes)

Assets = Liabilities + Shareholder Equity

So the real issue is which side is stronger.

3. The Simple Safety Test

Step 1: Compare Assets vs Liabilities

Healthy company:

✔ Assets > Liabilities

Red flag:

❌ Liabilities ≥ Assets

If liabilities are higher, the company already owes more than it owns.

Step 2: Check Shareholder Equity

Positive equity:

✔ Shareholders still own value

Negative equity:

❌ Shareholders technically own nothing

4. What Happens When a Company Collapses

Order of Payment in Liquidation:

Bond holders & lenders
Banks
Suppliers
Preference shareholders
Ordinary shareholders (YOU) - technically you are lsat to be paid from remaining amount.

👉 Shareholders are last in line.

If Assets < Liabilities:

Assets are sold
All money goes to debts
Shareholders get zero

5. Why Penny Stocks Are Extremely Dangerous

Many NSE penny stocks trade below 10 ksh.

People assume:

“It’s cheap, what can I lose?”

❌ Wrong

Cheap price does not mean safe company.

Most penny stocks have:

Heavy debts
Negative equity
Loss-making operations
Weak or dying business models

Even at KSh 10, you can lose 100%.

6. The Missing Piece: Business Future & Profitability

A balance sheet alone is not enough.

You must also ask:

Does this company have a real business?
Is it generating consistent profits?
Does it have a clear future in its industry?

A company with:

Weak balance sheet and
No profitable core business

👉 Is only surviving on speculation, not value.

7. One-Minute Balance Sheet Rule (Memorize This)

Before buying ANY NSE stock, ask three questions:

✅ Are total assets higher than total liabilities?
✅ Is shareholder equity positive?
✅ Does the company have a future and a concrete business that generates good profits?

If the answer is NO to all of these:

🚫 Do not buy — even if it looks cheap. Analyze further for signals.