A balance sheet is a financial statement prepared by a company that shows the financial standing of the company on a particular date. It is a very useful statement for both companies and stakeholders as it shows a company’s worth.
The balance sheet includes the details of current assets, current liabilities, fixed assets, and shareholders’ equity. However, the figures stated in the balance sheet may not be sufficient for many reasons as they solely may not give an idea about the required actions or comparisons to other companies or comparisons to the past years’ figures. For this purpose, financial ratios are calculated from the balance sheet figures.
The financial ratios compare one value against the other to present a picture that is understandable. There are many financial ratios that are determined based on balance sheet information. Some of these include:
- The working capital ratio also called the current ratio
- The quick ratio, etc.
The higher liquidity ratios show that the company is in a safe zone to pay off its current liabilities. Usually, a ratio greater than 1 is an indicator of a good financial position.
- Book value per share
- Earnings per share
- Price to earnings, etc.
The higher values of market ratios indicate whether the stock of the company is over-priced or underpriced as compared to the market prevalent price. Investors usually consider these ratios to make their investment decisions.
- Debt to equity
- Debt ratio, etc.
Debt ratios are important to existing as well as potential investors as these ratios show how much the company is leveraged which means how much debt the company owes and if it would be able to repay it.
- Return on equity
- Return on assets, etc.
As the name states, the profitability ratios are an indicator of profits or returns a company has been able to generate for its investors. The higher ratios are considered alluring by the shareholders or the investors.
In addition to the above-stated ratios, there are many other financial ratios which are calculated based on different financial figures presented in the balance sheet, income statement, and cash flow statement. These ratios are highly beneficial for stakeholders and potential investors as they present a simple and comparable picture. Along with the balance sheet, these ratios are provided in the financial report of the companies.
Financial statement study involves financial ratios. Ratio Analysis and Financial Statements join hands to decide whether the business is in acceleration or a pause. This analysis is a key comparison strategy through which the businessmen assess their earnings and find out their marketplace conveniently.
If you find an alert that your business is not doing well then get cautious to bring changes in your operations to get protected from a heavy loss. The following are the examples of some Balance Sheet Ratios
- Liquidity Ratios:
- Current Ratio
- Quick Ratios:
- Leverage Ratio:
- Debt ratio
- Worth ratio
If your business’s current ratio is getting down you can raise it by
- Paying debts on time.
- Adding profits again into the business.
These financial statements with business ratios are present online as a free template and if you want to calculate them for your business financial statements just download the templates for quick calculations.
The financial ratio analysis is vital as it is a parameter through which an investor decides to invest or not for the company. The financial organizations and creditors apply this analysis to check the business performance and compare the current standings of your business with others. They can keep a vigilant eye on business growth and could logically decide to invest or not in the future.
It is mandatory for a business to compile a comprehensive financial ratio analysis report to give the business a boost of progress.
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