HOW TO READ

A BALANCE
SHEET IN
7 MINUTES
BALANCE SHEET
A balance sheet is a snapshot of your
business at a specific point in time.

It tells you whether your business is stable

and financially healthy:

Is there cash
Can you pay your bills
How much debt do you have
What is the book value of the business
BALANCE SHEET
STRUCTURE
The structure of a balance sheet is:

Assets = Liabilities + Equity

This formula is intuitive when you remember

a company has to pay for what it owns
(assets) by either:

borrowing money (liabilities), or

bringing on investors (equity)
ASSETS
Assets are What you Own

Listed top to bottom in order of liquidity,

which is how quickly they can be converted
to cash:

Cash
Inventory (goods available for sale)
Accounts receivable (what people owe
you)
Fixed assets (land, machinery, equipment,
and buildings)
LIABILITIES
Liabilities are What you Owe

Current liabilities are due within 1 year:

accounts payable
income tax payable
current portion of debt

Long-term liabilities are due at any point

after that:

long-term debt
mortgages payable
EQUITY
Equity is What you're Worth

If you sold your assets and paid your

liabilities, equity is what is left over:

money contributed (common shares)

profits taken out of the business
(dividends)
earnings retained in the business
(retained earnings)
BALANCE SHEET
ANALYSIS
Now that we know how the financial
statement is structured, we can talk about
how to analyze it.

There are three types of ratios we will review

on the balance sheet:

liquidity
solvency
profitability
LIQUIDITY RATIOS
Liquidity ratios show your ability to turn
assets into cash and include:

cash ratio
quick ratio
current ratio
SOLVENCY RATIOS
Solvency ratios show your ability to pay off
debts and include:

cash ratio
quick ratio
current ratio
debt to equity
interest coverage
essential solvency ratio
PROFITABILITY RATIOS
Profitability ratios show your ability to
generate income from your balance sheet
assets and include:

return on assets
return on equity
return on invested capital
return on capital employed
CASH RATIO
The cash ratio measures your total cash and
cash equivalents against your total liabilities.

It is an indicator of your value under a worst

case scenario, such as a bankruptcy or
business shutdown.

A larger ratio is better.

QUICK RATIO
The quick ratio measures your ability to
meet your short-term obligations with your
most liquid assets - also called the acid test
ratio.

A higher ratio = better liquidity and

financial health.
CURRENT RATIO
The current ratio measures your ability to pay
short-term obligations or those due within one
year, sometimes called the working capital
ratio.

A ratio less than one indicates any debts due

within one year are greater than your current
assets
DEBT TO EQUITY RATIO
The debt to equity ratio compares total
liabilities against total equity, and it is used to
evaluate how much leverage you are using
in your business.

Less than 1 = safe

Greater than 2 = risky

Debt to equity is heavily dependent on

industry.
 If you enjoyed this post, you'll love my free
newsletter:

Join 25,000+ subscribers who get the weekly

Growth Guide newsletter where I provide actionable
ideas to help you live better, achieve more and be
financially free.

LINK IN BIO