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Balance sheet shows the financial situation of a company at a point in time (the balance sheet date). It includes three aspects: assets, equity and liabilities. The analysis of balance sheet is a complex process. It not only includes a large number of managing information, but also need to be analysed comprehensively with the income statement, cash flow, accounting policies and explanatory notes.
You must understand the structure of balance sheet. The face of the balance sheet should include:
- property, plant and equipment
- investment property
- intangible assets
- financial assets
- investments accounted for using the equity method
- biological assets
- inventories
- trade and other receivables
- cash and cash equivalents
- trade and other payables
- tax liabilities
- provisions
- minority interest
- issued capital and reserves.
Here, there are four main ratios groups when you're analysing the balance sheet: profitability, management effciency, financial and investment. Balance sheet involves the analysis of the management effciency and the financial. The analysis of the profitability and the investment need to combine the income statement.
Management efficiency:
- Inventory turnover.
- Accounts receivable collection period.
- Accounts payable payment period.
It insteads the turnover rate of the enterprise. Generally, if it's commercial enterprise, the more higher, the more better.
The more quicker, the more better. It shows the speed we can regain the cash.
It represents a source for free finance.
Financial:
- Current and liquid ratios.
- Equity to assets ratio.
It shows the short financial situation of the enterprise. Is the current assets sufficient to redeem the current debt? How much to redeem the current debt when the current assets minus the inventory? We know sometimes there are some problems in turning the inventory into cash.
The equity to assets ratio shows what proportion of total assets is financed by equity, and hence what proportion is financed by loans and non-equity shares.
Balance sheet is one of basic financial statements. You must know income statement, cash flow, accounting policies and explanatory notes. And you should understand the difference between the balance sheet and income statement, and know the key of how to analyse the balance sheet.
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