Learn to analyze your business using a balance sheet analysis example
The balance sheet provides a view of the financial side of a business on a particular date. An analysis of the balance sheet provides insight into the financial health of the business. Comparing balance sheets from the same business that are from different dates gives a good indication of how well that business is performing. The basic information contained on a balance sheet consists of:
- Assets – Total assets is a combination of all assets added together.
- Current assets
- Long term assets
- Liabilities – Total liabilities is all liabilities added together.
- Current liabilities
- Long term liabilities
- Net worth or Owner equity – Total assets minus total liabilities equals net worth.
This basic information can provide the answers to many questions about a business with the application of the right formulas. A balance sheet analysis example will show the different formulas being used on balance sheet information.
Formulas to look for on a balance sheet analysis example
There are many different formulas that can be applied to data taken from a balance sheet example to answer different questions about a business. Some of the answers that can be obtained include:
- Liquidity ratio – The liquidity ratio is a good indication of the ability of a business to meet obligations when they come due. Current assets divided by current liabilities provides the liquidity ratio.
- Debt structure ratio – This indicates the part of total debt that must be repaid within one year. The formula to calculate debt structure ratio is current liabilities divided by total liabilities equals debt structure ratio. A ratio of 1:5 (or .20) indicates that 20 percent of total debt must be repaid within one year.
- Net capital ratio – Measure of business solvency. Total assets divided by total liabilities equals net capital ratio. The higher the ratio the better.
- Debt-equity ratio – Another measure of business solvency. It is the relationship between borrowed and equity (or owned) capital used in a business. Total debt divided by owner equity equals debt-equity ratio. A rising debt-equity ratio means that debt is increasing.
If you are unable to figure out how to do your own analysis from a data sheet analysis example or balance sheet template, contact our company analysis service for help.
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