Reading the balance sheet and valuation essentials

This lesson explains how to read Alphabet’s 2019 balance sheet and how to calculate four core measures: book value, market capitalization, enterprise value, and the price-to-earnings (P/E) ratio. The explanation uses the figures shown in Business Acumen for Strategic Communicators: A Primer, Ch. 7–9.

1) Start with the balance sheet

A balance sheet shows what a company owns, what it owes, and the residual value belonging to shareholders. In the Alphabet example in Business Acumen for Strategic Communicators: A Primer, Ch. 7–9, the 2019 totals are:

• Total liabilities: $74,467 million
• Total stockholders’ equity: $201,442 million
• Total liabilities and stockholders’ equity: $275,909 million

These figures reflect the basic balance-sheet relationship:

Assets = Liabilities + Stockholders’ Equity

So if liabilities plus stockholders’ equity equal $275,909 million, then total assets are also $275,909 million.

2) Calculate book value

Book value (also called net book value or net asset value) is the accounting value of shareholders’ ownership in the business: in theory, what shareholders would receive if the company were liquidated. It starts from total stockholders’ equity.

From Business Acumen for Strategic Communicators: A Primer, Ch. 7–9, Alphabet’s 2019 total stockholders’ equity is $201,442 million.

You can also see how this equity is built from major components listed in the source:

• Common and capital stock plus additional paid-in capital: $50,552 million
• Accumulated other comprehensive loss: $(1,232) million
• Retained earnings: $152,122 million

The textbook expresses book value per share:

Book value per share = (Stockholders’ equity − Preferred stock) ÷ Shares outstanding

Alphabet reports $0 of convertible preferred stock, and the textbook gives its year-end 2019 book value as about $288.37 per share.

3) Calculate market capitalization

Market capitalization (“market cap”) is the total market value of a company’s equity. It is not taken directly from the balance sheet because it depends on the stock price at a certain date.

Market capitalization = Share price × Shares outstanding

Alphabet had approximately 698.6 million shares outstanding at year-end 2019 and a closing stock price of $1,337.02 on December 31, 2019:

698.6 million × $1,337.02 ≈ $934 billion

That made Alphabet one of the world’s most highly valued companies by market cap. The key interpretation:

• Book value comes from accounting records.
• Market capitalization comes from investor pricing in the stock market.

4) Calculate enterprise value

Enterprise value (EV) is a more comprehensive measure than market cap because it takes into account a firm’s cash position, debt outstanding and any preferred stock. It represents the minimum price someone would have to pay to acquire the entire company.

Enterprise value = Market capitalization + Total debt − Cash, cash equivalents and marketable securities

The textbook calculates Alphabet’s year-end 2019 EV from a market cap of almost $934 billion plus total debt of around $4.6 billion, minus cash, cash equivalents and marketable securities of around $132.8 billion:

EV ≈ $806 billion

(Note: the textbook uses about $132.8 billion of cash in this calculation, while the year-end 2019 balance-sheet line for cash, cash equivalents and marketable securities shows $119.7 billion.)

5) Calculate the P/E ratio

The price-to-earnings (P/E) ratio, sometimes called “the earnings multiple,” compares a company’s stock price with its earnings per share. It is perhaps the most widely used financial metric for valuing a company.

P/E ratio = Share price ÷ Earnings per share (EPS)

• Trailing P/E: $1,337.02 ÷ 2019 diluted EPS of $49.16 ≈ 27× earnings.
• Forward P/E: using the same price and analysts’ expected fiscal 2021 EPS of around $56.00 ≈ 24× earnings.

For comparison, the textbook gives historical average P/E ratios of around 20× for the information technology sector and 16× for the communication services sector.

6) What you can interpret confidently from the 2019 figures

Using Business Acumen for Strategic Communicators: A Primer, Ch. 7–9, you can draw several clear conclusions about Alphabet’s 2019 financial position:

• Alphabet had $275,909 million in total assets.
• It financed those assets with $74,467 million in liabilities.
• The remaining $201,442 million was stockholders’ equity, or about $288.37 of book value per share.
• The market valued its equity at about $934 billion, its EV was about $806 billion, and its trailing P/E was about 27×.
• Its equity base was much larger than its liabilities, indicating a strong balance-sheet position in accounting terms.

7) Summary formulas to remember

• Book value per share = (Stockholders’ equity − Preferred stock) ÷ Shares outstanding
• Market capitalization = Share price × Shares outstanding
• Enterprise value = Market capitalization + Total debt − Cash, cash equivalents and marketable securities
• P/E ratio = Share price ÷ EPS

8) Final takeaway

From the Alphabet 2019 figures in Business Acumen for Strategic Communicators: A Primer, Ch. 7–9: book value was about $288.37 per share (stockholders’ equity of $201,442 million), market capitalization was about $934 billion (698.6 million shares × $1,337.02), enterprise value was about $806 billion, and the P/E ratio was about 27× trailing (on $49.16 diluted EPS) and about 24× forward.