How to read a balance sheet, on one real filing

A balance sheet is a photograph. One day a year, the company stands still, and the accountants write down everything it has and everything it owes. Everything it has, minus everything it owes, is what is left for you, the owner. That is the whole thing. Three lists, one subtraction.

The reason people find it hard is that nobody shows them a real one. So here is a real one: Home Depot's, from its annual report for the year that ended on 1 February 2026, filed with the SEC on 18 March 2026. I chose Home Depot because you have been in one, because its balance sheet has every trap a beginner meets, and because it makes a very good joke: a company worth $105 billion in assets that, on paper, belongs to its owners to the tune of $13 billion. We will get to why.

Every number below is from that filing. Where I add a comparison, it is from the same company's filing ten years earlier, or from our own tables, and I say which.

The photograph, in three lists

Here is the whole balance sheet, rounded to the nearest hundred million, with the small lines folded into "other". The full one is two pages in the 10-K; this is the version you can hold in your head.

Source: The Home Depot, Inc., Form 10-K for the fiscal year ended 1 February 2026, consolidated balance sheet (filed 18 March 2026, accession 0001628280-26-019436). Sub-lines from the same filing's XBRL tags.

Assets equal liabilities plus equity, always, by construction. That is why it is called a balance sheet and not a list. If you only remember one thing: the right-hand column tells you who has a claim on the left-hand column, and the owners come last.

The four numbers to find first

You do not read a balance sheet top to bottom. You go to four places, and the rest is context.

1. Cash against debt due this year. Home Depot holds $1.4 billion of cash and owes $9.4 billion of debt within twelve months ($5.0 billion of bonds and leases coming due, plus $4.5 billion of commercial paper, which is a short-term IOU big companies roll over every few weeks). On that line alone a beginner panics. Do not. The company brought in $16.3 billion of cash from operations last year (that is on the cash flow statement, the balance sheet's sister; what to do with the profit line once you have it is ROIC vs ROE), so it pays that debt out of a few months of business, though that figure was $19.8 billion the year before, a drop worth its own sentence. The question is never "is there enough cash in the drawer"; it is "does the business make enough to cover what is due". Here, easily.

2. Inventory against sales. $25.8 billion of goods on the shelves against $164.7 billion of sales. Divide: the shelves turn over roughly six times a year, or every two months. For a retailer selling lumber, paint and dishwashers, that is normal. What you are watching is the direction. If inventory grows faster than sales for two years running, the company is buying things people are not buying, and the next line to move is the profit margin, downward. Home Depot's inventory rose 10% last year ($23.4 billion to $25.8 billion) while sales rose 3%; part of that is GMS, a distributor it bought in September 2025, which came with its own warehouses. Worth a note, not a worry yet.

3. Goodwill against equity. This is the trap. Goodwill is not a thing the company has. It is the amount it paid for other companies above what their own balance sheets said they were worth. Home Depot paid about $18 billion for SRS Distribution in 2024 and $5.5 billion for GMS in 2025, and most of that landed here: goodwill went from $2 billion ten years ago to $22.3 billion today. Add $10.3 billion of "intangibles" (brand names and customer lists that came in the same boxes) and you have $32.6 billion of assets you could not sell at a garage sale.

Now look at equity: $12.8 billion. Goodwill and intangibles alone are two and a half times the owners' claim. If the acquisitions disappoint and the accountants "impair" the goodwill (write it down), equity can go negative without a single store closing. This has happened to good companies. It is not a reason to sell; it is a reason to know that the number at the bottom right is softer than it looks.

4. Equity against assets, and why it is so small. Here is the joke I promised. $105 billion of assets, $12.8 billion of equity. Is Home Depot barely solvent? No. Read one line further down in the filing, in the equity section: retained earnings of $94.5 billion, and treasury stock of minus $96.0 billion.

Retained earnings are every dollar of profit the company ever kept. Treasury stock is every dollar it spent buying its own shares back from the market. Home Depot has, over decades, kept $94.5 billion of profit after paying dividends and spent $96 billion buying back its own stock. The equity is small because the owners have already been paid, in the form of a shrinking share count. The same company ten years ago, in January 2016: $42 billion of assets, $6 billion of equity, $33 billion of treasury stock. Same pattern, smaller numbers.

So a tiny equity line means one of two very different things: a company that has lost most of what it had, or a company that has handed most of what it earned back to its owners. The retained-earnings and treasury lines tell you which. Never judge equity without them.

The lines that lie a little

Every balance sheet has three lines that mean less than they say.

"Net of wear" is a guess. Stores, warehouses and trucks are carried at $28.0 billion, which is $59.5 billion of what they cost minus $31.4 billion of depreciation, an accountant's estimate of how much of them has been used up. A store built in 1995 might be carried at almost nothing and be worth a great deal; a fleet of trucks bought in 2022 might be carried at most of its cost and be worth half. The number is consistent, not true.

Leases are both sides. Since 2019 the buildings a company rents appear twice: $9.2 billion as an asset (the right to use them) and $8.2 billion plus a current slice as a liability (the rent it has promised). They nearly cancel. They are there so that a company cannot hide its obligations by renting instead of buying, which is what everybody did before 2019.

Deferred revenue is money for work not yet done. $2.6 billion of gift cards sold and deposits taken. It sits under liabilities because Home Depot owes the customer a dishwasher, not because it owes anyone cash. It is the friendliest liability on the page: the customer has already paid.

What the balance sheet cannot tell you

It cannot tell you whether the company is any good. Home Depot's is the balance sheet of a business that borrows a lot (debt of about $56 billion against equity of $13 billion), owns little cash, and has turned its profits into buybacks. That describes a superb business run for its shareholders, and it also describes a leveraged company one bad decade from trouble (why cheap is a forecast is about that second reading). The balance sheet says which liabilities exist; the income statement says whether the business earns enough to carry them (Home Depot earned $14.2 billion after tax last year); the cash flow statement says whether that earning arrived as cash ($12.6 billion free cash flow, after building and repairing stores). You need all three, and the balance sheet is the one to read first, because it is the one that changes slowest and lies least.

Doing this on any company in ten minutes

Here is the routine, in the order I do it, on the company page in our app (ask for the free report on any company to see it) or straight from the 10-K on the SEC's site:

1. Find the balance sheet date. It is at the top of the statement. A company whose year ends in January is a retailer telling you about Christmas; one whose year ends in September is telling you about summer.
2. Cash and short-term debt. Then, on the cash flow statement, operating cash flow. Is a year of cash flow bigger than the debt due this year? If not, read the debt footnote before anything else.
3. Inventory and receivables against sales, this year and last. Growing faster than sales is the early warning; the profit line reacts a year later.
4. Goodwill plus intangibles against equity. Above one, the equity is soft; know what was bought and when.
5. Retained earnings and treasury stock. A small equity is fine if the treasury line explains it, and alarming if the retained-earnings line is negative.
6. Write one sentence. Mine for Home Depot, dated 21 September 2026: "A heavily bought-back retailer with $56 billion of debt; the $9 billion due this year is covered nearly twice by one year's operating cash; $33 billion of goodwill and intangibles from two distributors; inventory growing faster than sales for one year."

That sentence is the balance sheet. Next year you read the new filing and check which words changed.

Educational and proprietary. This explains what our research does, not the exact formula behind it, and it is not personalised investment advice. See the full disclaimer.