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Formulas and Calculations for Analyzing a Balance Sheet

Investing Lesson 3 - Analyzing a Balance Sheet


Balance Sheet Putting It Together

When studying the balance sheet, it's important to know its limitation. In some cases, for instance, a business can show interest expense it's paid as an asset. In others, property can be depreciated and carried at $1 when it's worth millions.

Formulas & Calculations for the Balance Sheet

You've learned how to analyze a balance sheet! In Segment 2 we are going to work through the balance sheets of a few American companies. Here is a reference guide for all of the calculations you've learned so far. You should memorize these as soon as possible; they are priceless investment tools for the rest of your life.

Tests of a Company's Financial Strength and Liquidity:

Working Capital: Current Assets - Current Liabilities
Working Capital per Dollar of Sales: Working Capital ÷ Total Sales1
Current Ratio: Current Assets ÷ Current Liabilities
Quick / Acid Test / Current Ratio: Current Assets minus inventory (called "Quick Assets) ÷ Current Liabilities
Debt to Equity Ratio: Total Liabilities ÷ Shareholders' Equity

Tests of a Company's Efficiency:

Receivable Turnover: Net Credit Sales1 ÷ Average Net Receivables for the Period
Average Age of Receivables: Numbers of days in period ÷ Receivable Turnover
Inventory Turnover: Cost of Goods Sold1 ÷ Average Inventory for the Period
Number of Days for Inventory to Turn: Number of days in Period ÷ Inventory Turnover

1.) These can be found on the income statement, not the balance sheet.

Next page > Putting It All Together - What the Balance Sheet Can and Cannot Tell You > <<back, 29, 30, 31, 32, 33, 34, 35, 36, 37 >>

This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.

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