• Skip to primary navigation
  • Skip to main content
  • Skip to footer
WallStreetMojo

Wallstreet Mojo

Wallstreet Mojo

MENUMENU
  • Resources
        • Financial Statement Analysis

          • Ratio Analysis
          • Profitability Ratios
          • Turnover Ratios
        • Financial-Statement-Analysis
        • Accounting Basics

          • Income Statement
          • Balance Sheet
          • Cash Flow in Accounting
        • Accounting-Basics
        • Accounting Concepts

          • Assets in Accounting
          • Liabilities in Accounting
          • Shareholders Equity
        • Accounting-Concepts
        • Investment Banking Guides

          • Investment Banking
          • What is LBO?
          • What is Pitch Book?
        • Investment Banking Guides
        • Valuation

          • Discounted Cash Flow
          • Dividend Discount Model
          • Terminal Value
        • Valuation
        • Others

          • Resources (A to Z)
          • Financial Modeling
          • Financial Certifications
          • Equity Research
          • Private Equity
          • Excel
  • Free Courses
  • All Courses
        • Certification Courses

          Certificate
        • All in One Financial Analyst Bundle

          Financial-Analyst-Bundle
        • Accounting Course

          Accounting-Course
        • Investment Banking Course

          Investment-Banking-Training
        • Others

          • Equity Research Course
          • Financial Modeling Course
          • M&A Course
          • Valuation Course

          • Private Equity Course
          • Venture Capital Course
          • US GAAP Course
          • View All
  • 250+ Courses All in One Bundle
  • Login

Balance Sheet Ratios

Home » Financial Statement Analysis » Ratio Analysis » Balance Sheet Ratios

By Tejswini Bhosale Leave a Comment

Balance Sheet Ratios

What is Balance Sheet Ratio Analysis?

Balance sheet ratios are the key indicators to analyze the balance sheet strength of the company. Thus, balance sheet ratios are quantitative tests of the financial condition of the company.

Comparisons are essentially intended to shed light on how well a company is achieving its objectives in comparison to its peers in the same industry. Thus, balance sheet ratios are used to assess the expected returns, a risk associated, financial stability, etc. However, these ratios vary across industries and hence comparisons between companies from completely different industries is not valid. Balance sheet ratios majorly include balance sheet items like assets, liability, shareholders equity, etc.

Types of Balance Sheet Ratio Analysis

Balance Sheet Ratio Analysis can be classified into the following categories:

#1 – Efficiency Ratios

This type of Balance Sheet Ratio Analysis i.e. efficiency ratio is used to analyze how efficiently a company is utilizing its assets. It indicates the overall operational performance of the company.

Various efficiency ratios are as follows:

 Inventory Turnover Ratio

Inventory Turnover

It is calculated by dividing the cost of goods sold by average inventory available with the company on the balance sheet date.

Inventory Turnover = Cost of Goods Sold/ Average inventory

Inventory turnover ratio indicates how fast a company’s inventory is selling. In other words, they show how many times in a year company has sold its complete inventory and replenished it in a year. Low inventory turnover ratio indicates lower sales or that the company is holding up stocks of goods which are not in demand in the market. However, a high inventory turnover ratio doesn’t necessarily indicate the healthy position of the company unless it is coupled with good sales figures.

Receivable turnover ratio

Accounts Receivables Turnover

The receivable turnover ratio indicates how fast a company can recover its receivables from its customers. It is calculated as mentioned below:

Receivable Turnover = Net Sales / Average Receivables

A high receivable turnover ratio indicates that the money expected to be received by the company from its customers is stuck in credit i.e. customers are struggling to pay the bills. Though receivable turnover needs to be analyzed in comparison to the peers of the company in the same industry since the credit period given to customers vary from industry to industry. For example, a cash and carry business will always have a less credit period in comparison to the manufacturing industry

Payables turnover ratio

Payables Turnover

Payables Turnover Ratio indicates how fast the company is able to pay to its creditors. It is calculated by dividing purchases by creditors as on balance sheet date.

Popular Course in this category
Cyber Monday Sale
All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion
4.9 (1,067 ratings)
Course Price

View Course

Related Courses
Accounting CourseInvestment Banking CourseEquity Research Course
Payables Turnover = Purchases / Creditors outstanding

It indicates as to whether a company is paying its suppliers on time or not. Further a low payables turnover indicates that the company is not utilizing the benefits it might get by the credit period extended to them by the suppliers. Similar to account receivable turnover ratio, Payables ratio also needs to be analyzed basis the industry the company operates in.

Asset Turnover Ratio

Balance Sheet Ratios asset turnover ratio

Asset Turnover Ratio is calculated simply by dividing the sales with the total assets of the company. It indicates how efficiently the company utilizes its assets to generate revenue.

Asset Turnover = Net Sales / Total assets

Net Working Capital Turnover Ratio

Balance Sheet Ratios - net working capital

Net working Capital Ratio indicates whether the working capital of the company has been effectively utilized to generate sales.

Net Working Capital = Net Sales/ Net Working Capital

#2 – Liquidity Ratio

This type of Balance Sheet Ratio analysis is also known as banker’s ratio. It indicates the firm’s ability to meet its short-term obligations. Liquidity ratio is industry dependent and varies majorly from industry to industry.

Current Ratio

Balance Sheet Ratios - Current Ratio

Current Ratio indicates how readily a company can liquidate its current assets to pay off its current liabilities. It is calculated by dividing current assets by current liabilities.

Current Ratio = Current Assets/Current Liabilities

Current ratio ideally should be above 1.33 times. CR less than 1 may indicate that the company is raising short term funds from the market to create long term assets thus doing diversion of funds.

Quick Ratio

Balance Sheet Ratios - quick ratio

Quick Ratio is also known as the acid test ratio. It is a more stringent way of analyzing the liquidity of a company. It is calculated as under:

Quick Ratio = (Current Assets – Inventory)

Inventory is a major part of current assets of the company however at the time of distress it might not be easily convertible to cash and hence cannot be used for instant debt pay or recovery.

Cash Ratio

Balance Sheet Ratios

Most conservative liquidity ratio is cash ratio. Cash is the most liquid asset on the balance sheet of the firm and hence cash ratio indicates what is the percentage to which the cash present with the company covers the short obligations of the company. It is usually used for a company in distress.

Cash ratio = Cash + Marketable securities/Current

 #3 – Solvency Ratio

This type of Balance Sheet Ratio i.e. Solvency ratio measures a company’s ability to repay its debt obligations. It indicates whether the company is churning enough cash flow to meet its short term and long-term debt obligation.

Types of Solvency Ratio are as follows,

Debt to Equity Ratio

Pepsi Debt to Equity Ratio

Debt to Equity Ratio is also called financial gearing. It indicates how much equity is available to cover debt obligations.

Debt to Equity = Total long-term debt/ Shareholders fund

Debt Service Coverage Ratio (DSCR)

DSCR calculations - Colgate Ratio Analysis

DSCR Ratio indicates the ability of a company to repay its debt obligations.

DSCR = (Profit after tax + Depreciation + Interest) / (Interest Payments+ Principal Payments + Lease Payments)

Debt to Asset Ratio

Debt to Asset Ratio Formula

Debt to Asset is used to analyze what portion of assets of the firm are funded by debt. A high number indicates high financial leverage

Debt to Asset = Total Assets/ Total debt

#4 – Profitability Ratios

These balance sheet ratios measure of the overall profiability of the business. Following are the types of Profitability Ratios.

Return on Asset

return-on-total-assets

Return on Asset measures the efficiency with which total assets of the company are able to generate a net profit. High ratio value indicates efficient utilization of company’s assets.

Debt to Asset = Total Assets/ Total debt

Return on Equity

Analysis Colgate

Return on Equity is a measure of returns that the company is generating vis-à-vis the equity invested in the firm.

ROE = Net Income/ Shareholder’s Equity

Recommended Articles

This has been a guide to Balance Sheet Ratio Analysis. Here we discuss the top 4 types of Balance Sheet Ratios like Efficiency ratios, Liquidity Ratio, Solvency Ratio, & Profitability Ratios along formulas and classifications. You can learn more about accounting from the following articles –

  • What is a Balance Sheet Reconciliation?
  • Solvency Ratio Formula
  • Current Liabilities Formula
  • How to Read a Balance Sheet?
  • (COGM) Cost of Goods Manufacture
  • Working Capital Turnover Ratio
  • List of All Financial Ratios (Formulas)
  • Ratio Analysis in Excel
  • Limitation of Ratio Analysis
  • Advantages of Ratio Analysis
19 Shares
Share
Tweet
Share

Filed Under: Financial Statement Analysis, Ratio Analysis

Reader Interactions
Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Footer
COMPANY
About
Reviews
Blog
Contact
Privacy
Terms of Service
FREE COURSES
Free Finance Online Course
Free Accounting Online Course
Free Online Excel Course
Free VBA Course
Free Investment Banking Course
Free Financial Modeling Course
Free Ratio Analysis Course

CERTIFICATION COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Business Valuation Course
Equity Research Course
CFA Level 1 Course
CFA Level 2 Course
Venture Capital Course
Microsoft Excel Course
VBA Macros Course
Accounting Course
Advanced Excel Course
Fixed Income Course
RESOURCES
Investment Banking
Financial Modeling
Equity Research
Private Equity
Excel
Books
Certifications
Accounting
Asset Management
Risk Management

Copyright © 2019. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Ratio Analysis Course

Step by Step Guide to Calculating Financial Ratios in excel

By continuing above step, you agree to our Terms of Use and Privacy Policy.

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

Download Colgate Ratio Analysis Template

By continuing above step, you agree to our Terms of Use and Privacy Policy.
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

By continuing above step, you agree to our Terms of Use and Privacy Policy.

* Please provide your correct email id. Login details for this Free course will be emailed to you

CYBER WEEK OFFER - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More