Balance sheet analysis (Ratio Analysis)

Balance sheet, also known as the statement of financial position is a summary of the financial balances of a corporation. The business may be that of a sole proprietorship, a business partnership or a company. The balance sheet is a snapshot of the company’s financial position. The balance sheet of a company is an integral part of the financial statements. Balance sheet analysis refers to the analysis of the assets, liabilities and the equity of a company to determine company’s profitability and the earnings.

The balance sheet analysis will help the company determine and also to tell the investors about the company’s fundamentals, how much debt the company owes, the debtors and the creditors of the company, about the amount of cash and cash equivalents and what kinds of funds the company has generated over the time.

The balance sheet comprises of three main components. They are the assets, liabilities and the equity. The equity items are paid-in capital and retained earnings. The balance sheet analysis for your business can be completed in one of two different ways.  The first way is the general ledger system which is sometimes called the double entry system. The other way of balance sheet analysis is by using the assets, liabilities and owner's equity.

Assets = Liabilities + Owner's Equity

Assets are items your company owns which include: accounts receivable, inventory, equipment and so on. The analysis of the assets of a balance sheet helps the investors get attracted to companies with plenty of cash on their balance sheets. Liabilities are items that the company owes, which includes accounts payable, payroll accrual etc. The liabilities offer the view of manageable amount of debt. Owner's Equity is shareholders and owner’s equalities. The paid-in capital of a company is the amount of money shareholders paid for their shares when the stock was first offered to the public. In other words it is money the firm received when it sold its shares

Questions:

• What is balance sheet analysis?
• What are the two ways of balance sheet analysis?