The Balance Sheet
The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements.
The Balance Sheet
• Also known as a “statement of financial position”
• Reveals a company’s assets, liabilities and owners’ equity
• A snapshot of the company’s financial position at a single point in time
• Divided into two parts that must equal, or balance each other…
The Balance Sheet
• Assets are equal to the sum of the company’s equity investment or capitalization, plus retained earnings, minus any current financial obligations or debt.
• Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets.
• Owner or shareholder equity is the amount of money initially invested into the company plus any retained earnings and it represents a source of funding for the business.
Debt-to-Equity Ratio
• A measure of a company’s financial leverage
• Calculated by dividing total liabilities by shareholders’ equity
• Indicates what proportion of equity and debt the company is using to finance its assets.
Debt-to-Equity Ratio
Debt-to-Equity equation:
Total liabilities ÷ Shareholder equity
• Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation
• This ratio can be applied to personal financial statements as well as corporate ones
Debt-to-Equity Ratio
• A measure of a company’s financial leverage
• Calculated by dividing total liabilities by shareholders’ equity
• Indicates what proportion of equity and debt the company is using to finance its assets.
Quick Ratio
• An indicator of a company’s short-term liquidity
• Shows the dollar amount of liquid assets available for each dollar of current liabilities
• Measures a company’s ability to meet its short-term obligations with its most liquid assets
Quick Ratio
Quick Ratio equation:
Assets – Inventories ÷ Liabilities
• Assets include cash and equivalents, marketable securities, and accounts receivable
• The higher the Quick Ratio, the better the company’s liquidity
Debt Service Coverage Ratio
• A measure of a company’s ability to meet its financial obligations
• Generally, the higher the coverage ratio, the better the ability to fulfill obligations to lenders
• The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company’s financial position.
• Common coverage ratios include the interest coverage, debt service coverage and asset coverage
Days Sales Outstanding (DSO)
• A measure of the average number of days that a company takes to collect revenue after a sale has been made
• A low DSO number means that it takes a company fewer days to collect its accounts receivable
• A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money
Days Sales Outstanding (DSO)
Calculating DSO:
Accounts Receivable ÷ Total Credit Sales × Number of days in period
Inventory Turnover
• Also known as inventory turns, stock turns, and stock turnover
• How to calculate:Cost of good sold ÷ Average inventory
Inventory Turnover
• A low turnover rate may point to overstocking,
obsolescence, or deficiencies in the product line or marketing effort.
• However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages.
• Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low. This often can result in stock shortages.
Tangible Net Worth
• A measure of the physical worth of a company, not including intangible assets such as copyrights, patents and intellectual property.
• How to calculate:Tangible Net Worth =
Total assets − liabilities − Intangible assets