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Putting It All Together
The balance sheet financial ratios are important parts of valuing a stock or analyzing a small business.
Formulas and Calculations for Analyzing a Balance Sheet
Various formulas and calculations used to analyze a balance sheet including financial ratios such as receivable turnover and working capital per dollar of sales and current ratio and debt to equity ratio are important for investors attempting to understanding how well a business is performing.
Retained Earnings on the Balance Sheet
Retained earnings are the profits a company has reinvested in itself. Retained earnings are carder on the balance sheet under Shareholder Equity.
Treasury Stock
Treasury stock is listed under shareholder equity on the balance sheet. It represents the stock a company has issued and subsequently reacquired.
Capital Surplus and Reserves
Capital surplus and proprietorship reserves on the balance sheet are important to understanding the strength of a company, whether analyzing a small business or researching a stock.
Common, Preferred, and Convertible Shares
Common Preferred and Convertible Shares are carried on the balance sheet. Learn more in Investing Lesson 3
Book Value
Book Value and Net Tangible Assets are the excess of assets excluding intangible items subtracted by total liabilities. Book value can be calculated using the balance sheet.
Shareholder Equity
Shareholder equity is the difference between total assets and total liabilities on the balance sheet.
Minority Interest on the Balance Sheet
Minority Interest is found on the balance sheet under Liabilities. It is the value of the minority shareholders' holdings in a company's subsidiary or affiliate.
Other Liabilities
Other liabilities on the balance sheet represent items such as accrued expenses, sales tax payable, or other debts.
Long Term Debt and the Debt to Equity Ratio on the Balance Sheet
Long term debt and the debt to equity ratio are important indications of the financial stability of a company. They can be found using the balance sheet.
Deferred Long-Term Asset Charges
On a balance sheet, deferred long term asset charges are used to spread out asset charges over longer periods of time, as opposed to having them affect the company's earnings in a single quarter or year.
Goodwill on the Balance Sheet
Accounting goodwill is the premium over book value a company pays during an acquisition. It goes on the balance sheet and is subject to periodic tests for goodwill impairment.
Intangible Assets
Intangible assets on the balance sheet represent items such as patents, rents, royalties, and other assets that don't have physical form but still have value. Intangible assets are an important part of companies such as pharmaceuticals, which rely on drug patents to make money.
Property, Plant and Equipment
Property, plant and equipment on the balance sheet represents fixed assets purchased for a company's operations such as factories, machines, computers, and other necessary assets.
Long Term Investments
Long term investments and carrying values on the balance sheet are easy to understand. Both long term investments and long term assets represent assets owned by a company that may not be easily converted to cash but still have value.
Quick Test Ratio
The quick test ratio is the strongest test of a company's liquidity and is an extreme measure of a company's working capital.
The Current Ratio
The current ratio is a test of a company's liquidity. It can be calculated by dividing current assets by current liabilities on the balance sheet.
Negative Working Capital
Negative working capital is possible for companies with high inventory turnover.
Working Capital Per Dollar of Sales
Working capital per dollar of sales is a financial ratio that can tell you how much working capital a business needs for ever one dollar of revenue it generates.
Working Capital
Working capital on the balance sheet is the difference between current assets and current liabilities. The reason working capital is so important is because it lets you know the resources management has on hand to pay day-to-day bills and conduct operations. Some companies, such as Wal-Mart or other restaurants, can actually have negative working capital.
Current Liabilities
Current liabilities on the balance sheet represent all of the liabilities or debts a company owes for the next twelve months. Current liabilities are an important part of measuring a company's liquidity position.
Prepaid Expenses and Other Current Assets
Prepaid expenses on the balance sheet represent a current asset because the company still has the right to receive the product or service for which it has paid.
Inventory Turns / Inventory Turnover
Inventory turns and inventory turnover can be calculated for any company using the information found on the income statement and balance sheet.
Inventory on the Balance Sheet
Inventory carried on the balance sheet consists of goods or merchandise a company has but may not yet have sold to customers. When managing inventories you should try to keep them as low as possible to increase profits and return on equity.
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