The Balance Sheet depicts the financial situation of a company, measuring how healthy and profitable the company actually is. At the end of the accounting period (year, quarter, month), the balance sheet lists the company’s assets and the liabilities it owes. In other words, the balance sheet is about:
– Liquidities representing the company’s capacity to meet its obligations
– Financial health. This term is somehow similar to liquidities but in long-term vision. The financial health reflects the competitiveness and the capability of a company to secure its future, support marketing efforts and use technology while maintaining and expanding its operations.
The balance sheet also determines the operating performance of a company in terms of profits and cash flows regarding revenue, assets and investments.
The data in the balance sheet evaluates assets’ performance: inventory (inventory turnover ratio), customer credit, total asset turnover, degree of vertical integration (measuring how efficient the management of the supply chain is).
To analyze a balance sheet, mathematical formulas are used (the so-called ratios) so they measure the company’s performance against specific factors like: benchmarking (the performance of the company compared to other similar businesses), budget (performance standards) and trends (analyses the company’s past financial history).
Here is an example:
