How Do You Analyze A Balance Sheet?
In order to understand and determine the financial health of an organization, it is a good idea to analyze the balance sheet. A few simple calculations can provide insight into the firm’s liquidity and leverage. Read on to lean about the calculations and ratios that should be reviewed in order to analyze a balance sheet. Examine the Current Ratio. This ratio is an indication of the company’s ability to pay its short-term obligations. It is calculated by: Current Ratio = Current Assets divided by Current Liabilities A lower than average industry current ratio may suggest a liquidity issue while a higher than industry average industry current ratio may suggest that the firm may not be using its’ current funds efficiently. Review the quick ratio, otherwise know as the acid test. Quick ratio = Current Assets (less inventory) divided by Current Liabilities. In the denominator of the Quick Ratio the value of inventory is excluded. Because of this inventory exclusion, the quick ratio is more
