The Balance Sheet The balance sheet together with

The Balance Sheet The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements.

The Balance Sheet • Also known as a “statement of financial position” • Reveals a company’s assets, liabilities and owners’ equity • A snapshot of the company’s financial position at a single point in time • Divided into two parts that must equal, or balance each other…

The Balance Sheet The balance sheet equation: Assets = Liabilities + Shareholders’ Equity

The Balance Sheet • Assets are equal to the sum of the company’s equity investment or capitalization, plus retained earnings, minus any current financial obligations or debt. • Assets are what a company uses to operate its business, while its liabilities and equity are two sources that support these assets. • Owner or shareholder equity is the amount of money initially invested into the company plus any retained earnings and it represents a source of funding for the business.

Ratios

Debt-to-Equity Ratio • A measure of a company’s financial leverage • Calculated by dividing total liabilities by shareholders’ equity • Indicates what proportion of equity and debt the company is using to finance its assets.

Debt-to-Equity Ratio Debt-to-Equity equation: Total liabilities ÷ Shareholder equity • Sometimes only interest-bearing, long-term debt is used instead of total liabilities in the calculation • This ratio can be applied to personal financial statements as well as corporate ones

Debt-to-Equity Ratio • A measure of a company’s financial leverage • Calculated by dividing total liabilities by shareholders’ equity • Indicates what proportion of equity and debt the company is using to finance its assets.

Quick Ratio • An indicator of a company’s short-term liquidity • Shows the dollar amount of liquid assets available for each dollar of current liabilities • Measures a company’s ability to meet its short-term obligations with its most liquid assets

Quick Ratio equation: Assets – Inventories ÷ Liabilities • Assets include cash and equivalents, marketable securities, and accounts receivable • The higher the Quick Ratio, the better the company’s liquidity

Debt Service Coverage Ratio • A measure of a company’s ability to meet its financial obligations • Generally, the higher the coverage ratio, the better the ability to fulfill obligations to lenders • The trend of coverage ratios over time is also studied by analysts and investors to ascertain the change in a company’s financial position. • Common coverage ratios include the interest coverage, debt service coverage and asset coverage

Inventory and Sales

Days Sales Outstanding (DSO) • A measure of the average number of days that a company takes to collect revenue after a sale has been made • A low DSO number means that it takes a company fewer days to collect its accounts receivable • A high DSO number shows that a company is selling its product to customers on credit and taking longer to collect money

Days Sales Outstanding (DSO) Calculating DSO: Accounts Receivable ÷ Total Credit Sales × Number of days in period

Inventory Turnover • Also known as inventory turns, stock turns, and stock turnover • How to calculate: Cost of good sold ÷ Average inventory

Inventory Turnover • A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. • However, in some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or expected market shortages. • Conversely a high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business as the inventory is too low. This often can result in stock shortages.

Tangible Net Worth • A measure of the physical worth of a company, not including intangible assets such as copyrights, patents and intellectual property. • How to calculate: Tangible Net Worth = Total assets − liabilities − Intangible assets

Gross Margins • …

Contribution Margins • …

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