A balance sheet is a photograph rather than a film. It states what the business owns and owes on one date, not what happened over a period.
Assets equal liabilities plus equity, always, because equity is defined as the difference.
The first reading: can it pay what is due soon
Current assets against current liabilities. Current means within a year — see assets and liabilities.
The difference is working capital, and as a ratio it is the first of the liquidity ratios. Below one, the business owes more in the next year than it expects to receive.
The stricter version excludes inventory, on the basis that stock may not convert to cash when it is needed.
The second reading: who funded it
Liabilities against equity, which is debt to equity.
High means the business is funded largely by lenders, which magnifies both good and bad years and reduces the capacity to borrow again.
What to check rather than accept
Money owed by customers. A large figure is only an asset if it is collectable — see accounts receivable aging.
Inventory. Carried at cost, including whatever will never sell — see dead stock.
Fixed assets. Carried at cost less depreciation, which is a convention rather than a valuation. Old equipment may be worth much more or much less than the figure shown.
Owner loans. Money the owner put in, or took out, frequently sits here and is the line most often misunderstood.
Two dates side by side
A single balance sheet says little. The same one alongside the position a year earlier shows the direction: whether debt is rising, whether receivables are growing faster than revenue, whether equity is being built or withdrawn.