How to Analyze a Balance Sheet: The easiest, quickest way is to use ratios. We can break down a balance sheet by three categories: • Liquidity • Solvency • Efficiency 𝗟𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗥𝗮𝘁𝗶𝗼𝘀 Measure short-term debt-paying ability of a company. • Current Ratio =Current Assets / Current Liabilities • Quick Ratio =Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities • Cash Ratio =Cash & Cash Equivalents / Current Liabilities A ratio between 1-3 is a good sign for a company, suggesting that a business has enough cash to be able to pay its debts. A ratio of < 1 means that the company can't pay its debts. It may be necessary to finance or extend the time required to pay creditors. 𝗦𝗼𝗹𝘃𝗲𝗻𝗰𝘆 𝗥𝗮𝘁𝗶𝗼𝘀 Measure a company's long-term paying ability. • Debt-To-Equity Ratio = Total Debt / Total Equity • Debt Ratio = Total Debt / Total Assets A high ratio signifies a greater amount of debt and consequently, higher risk for the company. 𝗘𝗳𝗳𝗶𝗰𝗶𝗲𝗻𝗰𝘆 𝗥𝗮𝘁𝗶𝗼𝘀 Measure the efficiency of converting assets into cash. • Receivables Turnover Ratio =Sales / Accounts Receivable • Inventory Turnover Ratio =COGS / Inventories • Asset Turnover Ratio =Sales / Total Assets We can also measure efficiency in days. Analyze balance sheets efficiently using liquidity, solvency, and efficiency ratios to assess a company's short-term and long-term debt management and asset utilization. *** P.S. Want to grow as an investor? Learn to Start valuing a company in 7 days for free. Discover the 6-step process to value companies. Unravel the mystery of valuing Google, Microsoft, Amazon, and more. Join here (it's free) → https://lnkd.in/eBkF6sBu | 11 comments on LinkedIn