Purpose of a financial balance sheet analysis
The main purpose of a financial balance sheet analysis is to determine if a company is financially strong and economically efficient in the way it conducts business. There are a number of questions that need to be answered to establish if that is the case including:
- Does the company have the ability to pay bills coming due?
- Does the company have enough cash to survive?
- How much long-term debt does the company have?
- How much inventory is being carried?
A company often needs this type of information for investors or to borrow money from a bank. Balance sheet analysis can be used to get the answers for these and other questions.
Elements of a financial balance sheet analysis
The analysis of a company’s financial balance sheet will include the following elements:
- Cash Position: Amount of cash and short-term investments in relationship to liabilities. A company’s cash position lets you know if it has enough cash to survive.
- Working Capital: Indicates the amount of capital a company has available to work with. Current Assets – Current Liabilities = Working Capital
- Working Capital Per Dollar of Sales: Amount of capital a company has available to work with for every dollar of sales that it has. Working Capital/Total revenue = Working Capital Per Dollar of Sales
- Current Ratio: Helps to answer the question of a companies ability to pay bills coming due. Current Assets/Current Liabilities= Current Ratio
- Quick Ratio: Similar to Current Ratio but more accurate as it considers inventories held (Current Assets – Inventories) / Current Liabilities = Quick Ratio
- Receivable Turn: Total Revenue/Average Receivables = Receivable Turn
- Debt to Equity Ratio: Helps to identify a company’s financial strength by determining how much of a company’s expansion is financed by debt. Total Liabilities/Shareholder Equity = Debt to Equity Ratio
If you don’t know how to analyze a balance sheet, you can use our tips. These are some of the elements used in a financial balance sheet analysis but not all. If you have any difficulty with performing a financial balance sheet analysis, our company analysis service provides you an alternative.
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