How to analyze the balance sheet

RATIO ANALYSIS

  • Liquidity: Ability to pay bills and financial obligations
    • Current ratio: Total current assets/total current liabilities: Should be 2.0 or higher
    • Quick ratio: Cash and accounts receivable/total current liabilities: Should be 1.0 or higher
  • Leverage: Financial strength:
    • Debt-to-equity ratio: Total debt/equity. Should be 1.0 or smaller
  • Efficiency: The higher, the better
    • Return on equity: Net income/total equity
    • Return on assets: Net income/total assets

TREND ANALYSIS

  • Compare against similar companies or industry averages
  • Compare against previous years