Balance sheet ratios

Balance sheet ratios compare the various line items on a balance sheet in order to infer the liquidity, efficiency, and financial structure of a business. The following list includes the most common ratios used to analyze the balance sheet:

Liquidity Ratios

  • Current ratio. Compares all current assets to all current liabilities to see if there are enough current assets to pay for current liabilities. Its main failing is that the inventory component of current assets can be difficult to sell off.
  • Quick ratio. Compares all current assets except inventory to current liabilities to see if there are sufficient assets capable of being liquidated in the near future to pay for current obligations.

Efficiency Ratios

  • Accounts receivable turnover. Compares net credit sales for the year to average receivables in order to determine how quickly receivables are being collected.
  • Inventory turnover. Compares the cost of goods sold for the year to average inventory in order to determine how quickly a business is selling off its inventory.
  • Accounts payable turnover. Compares total supplier purchases to average accounts payable in order to determine whether a business is paying its suppliers too soon or too late.

Financial Structure Ratios

  • Debt to equity ratio. Compares the amount of all debt to equity. A high proportion indicates that the financial structure of a business may contain too much debt, which increases the risk of bankruptcy.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements