Balance Sheet Analysis Techniques

Figuring out how well your business is doing can seem hard, but it gets easier when you know how to look at a balance sheet. A balance sheet shows what your company owns and owes at a certain time. It's like a snapshot of your business's financial health. Here are simple Ways to Look at a Balance Sheet: [1] Horizontal Analysis: Compare financial data over multiple periods to identify trends and growth patterns. This approach helps in understanding how assets, liabilities, and equity are evolving over time. [2] Vertical Analysis: This technique involves taking each item on the balance sheet as a percentage of total assets or liabilities to understand the structure and composition of your finances better. [3] Ratio Analysis: Critical ratios like the current ratio, debt-to-equity ratio, and return on equity ratio offer insights into liquidity, financial leverage, and profitability. These ratios are instrumental in assessing the financial health and operational efficiency of your business. [4] Common Size Analysis: Convert each line item on the balance sheet into a percentage of total assets or total liabilities plus equity. This comparison allows for benchmarking against industry standards or competitors. [5] Benchmarking: Comparing your company's balance sheet with those of leading competitors or industry averages can highlight strengths and pinpoint areas for improvement. ▶️ Pros of Balance Sheet Analysis: -> Offers clear insights into the financial structure and health of your business. -> Empowers strategic decision-making based on financial stability and growth prospects. -> Identifies financial trends and potential red flags that warrant further investigation or action. ▶️ Cons of Balance Sheet Analysis: -> Thorough analysis requires time and diligence. -> For those unfamiliar with financial statements, balance sheet analysis can be daunting. -> A balance sheet is a snapshot at a specific point in time and may not reflect future potentials or risks accurately. Learning to read a balance sheet can give you valuable insights into your business's financial state. It's a straightforward tool that can help you make smart decisions for your business's future. How do you analyze the balance sheets? #balancesheet #financeandaccounting

The Balance Sheet is the most valuable Financial Statement, yet most businesses ignore them. Here is what the Balance Sheet teaches you and how to analyze it: The Balance Sheet formula is: Assets = Liabilities + Equity Rework that formula and you get Assets - Liabilities = Equity What you own - what you owe = book value of the business. In this way, it’s answering the question, is this business healthy? A book value < 0 = Accounting Insolvency But Accounting Insolvency is just a book number; you might still be able to meet your obligations with cash flows. Good? No… but not cash flow insolvency, where you can’t meet your short or long-term obligations. The Balance Sheet is broken into 3 sections: • Assets: what you own • Liabilities: what you owe • Equity: the difference Both Assets & Liabilities are further broken down into short-term (less than year) or long-term (more than year hold or maturity). The Equity section is broken into these components: • Common stock (initial capital investment) • Owner’s contributions • Owner’s distributions • Retained earnings • Current Year Net Income Current Year Net Income from the Income Statement shows up in the equity section. Every year, that balance is zeroed out and rolled in Retained Earnings, which is a reflection of historical earnings of the business. To analyze this statement, you’re going to do two types of analysis: • Horizontal • Ratio Horizontal Analysis is looking at the change between a past period and the current period. That can be past month, quarter, or year. With Ratio Analysis, you’ll look for benchmarks as well as trends. Some common types of ratios are: • Liquidity Ratios These ratios measure your ability to turn assets into cash. Some favorites are: - Current Ratio or Quick Ratio - Cash Burn Rate / Cash Runway - Cash Conversion Cycle • Solvency Ratios These ratios show your ability to pay-off debts. Some common ones are: - Debt-to-equity Ratio - Interest Coverage Ratio - Debt Service Coverage Ratio • Return on Ratios These tell you what your return on investment is. Trying to use your assets efficiently? Use Return on Assets (ROA) Looking to measure financial efficiency compared to competitors? Return on Equity (ROE) Wonder how efficiently you’ve deployed investor capital? Return on Invested Capital (ROIC) Want to understand how well current capital is utilized (especially in capital-intensive industries)? Return on Capital Employed (ROCE) You should NEVER use all of these ratios. Choose the specific analysis tools that are best for your business and watch: • trends • thresholds When a trend turns bad or a threshold number is broken, dive deeper and determine why. Thanks for reading! If you’re a business owner and want to be able to use your financials as a decision-making tool, check out my cohort (it starts March 11th): https://lnkd.in/gXMntDyz

Understanding the Balance Sheet A balance sheet is a fundamental financial statement that provides a snapshot of a company's financial position at a specific point in time. It is an essential tool for investors, creditors, and analysts to assess a company's solvency, liquidity, and overall financial health. The balance sheet follows the accounting equation, which states that assets equal liabilities plus equity. In this article, we will delve into the components of the balance sheet and explore their significance in evaluating a company's financial stability. Components of a Balance Sheet: 1. Assets: -Current Assets: These are assets expected to be converted into cash or used up within one year. Examples include cash, accounts receivable, inventory, and short-term investments. -Non-current Assets: Also known as long-term assets, these are resources with a useful life of more than one year. Examples include property, plant, equipment, intangible assets, and long-term investments. 2. Liabilities: -Current Liabilities: Debts and obligations due within one year, including accounts payable, short-term debt, and accrued expenses. -Non-current Liabilities: Long-term debts and obligations that extend beyond one year, such as long-term loans, bonds, and deferred tax liabilities. 3. Equity: -Shareholders' Equity: This represents the residual interest in the assets of the company after deducting liabilities. It includes common stock, additional paid-in capital, retained earnings, and other comprehensive income. Analyzing the Balance Sheet: 1. Liquidity Ratios: - The balance sheet helps calculate key liquidity ratios like the current ratio (current assets/current liabilities) and the quick ratio (quick assets/current liabilities). These ratios assess a company's ability to meet short-term obligations. 2. Debt Ratios: - Examining the proportion of debt to equity (debt-to-equity ratio) or total assets (debt ratio) provides insights into a company's leverage and financial risk. 3. Asset Turnover: - The balance sheet aids in calculating asset turnover ratios, which measure how efficiently a company utilizes its assets to generate revenue. 4. Book Value: - Shareholders' equity on the balance sheet helps determine the book value per share, serving as a benchmark for evaluating a stock's intrinsic value. 5. Financial Health Assessment: - A strong balance sheet with healthy levels of assets relative to liabilities signifies financial stability and resilience during economic downturns. #accounting #balancesheet #accountant #accountingtips #accountingservices #freshers

Many financial analysts kick off their examination of financial statements with a two-pronged approach: Vertical and horizontal analysis.   📊 Vertical Analysis   This technique tackles the question: "How does this company's performance during a specific period compare to others in the same industry?" The key here is establishing a base number for each statement:   Income Statement: Typically, total revenue is used as the base or denominator for the analysis. This serves as a yardstick against which all other accounts are measured. It's akin to a financial magnifying glass that reveals whether costs are higher or lower than industry standards or budgeted.   Balance Sheet: For balance sheets, the focus shifts to how assets, liabilities, and equity contribute to the total asset composition (the base). This evaluation is critical for assessing liquidity, solvency, and the company's capital structure.   Statement of Cash Flows: In this statement, vertical analysis helps us grasp the sources and applications of cash by examining the percentage of cash flows from operations, investing, and financing activities. Typically, net operating cash flow is used as the base, as it's the heartbeat of the company, influenced by factors like net income, working capital, and management's day-to-day operations decisions.   📈 Horizontal Analysis   Contrastingly, horizontal analysis tracks increases in each account from one period to another. This is why vertical analysis is about comparing accounts up and down the statements (across different accounts), while horizontal analysis is about observing changes from left to right (over time).   Income Statement: Horizontal analysis here unveils revenue growth, expense trends, and margin fluctuations year over year. It's a tool for assessing consistency, particularly when it comes to Compound Annual Growth Rate (CAGR). CAGR smoothes out the annualized growth rate over a set period, helping us identify trends, including periods of rapid growth or decline.   Balance Sheet: Tracking changes in assets and liabilities year over year allows management to explain their financial position performance. Particularly, improvements in current assets and liabilities can indicate how well-prepared a company is to weather financial challenges.   Statement of Cash Flows: On the cash flow front, horizontal analysis highlights changes in cash flow, offering insights into management's priorities within the three cash flow buckets: operations, investing, and financing.   By combining these analytical tools, financial analysts can paint a detailed picture of a company's financial health, projecting future trends in terms of margin proportions and cash flow from vertical analysis, and most critically, assessing growth from horizontal analysis.   These techniques are my go-to for every model and report I build, and they should be a staple in your financial analysis toolkit as well!   #StartupConsulting #FinancialModeling #RevenueRick #RobynCG