The Balance sheet is a representation of the company’s financial health. It is produced as of a specific point in time, usually the end of the fiscal (accounting) year or month. It lists the assets that the company owns and the liabilities that the company owes to others; the difference between the two represents the ownership position (stockholders’ equity).
More specifically, the balance sheet tells us about the company’s:
Liquidity: The company’s ability to meet its current obligations.
Financial health: The company’s ability to meet its obligations
over the long term; this concept is similar to liquidity
except that it takes a long-term perspective. It also incorporates
strategic issues.
- Secure adequate resources to finance its future
- Maintain and expand efficient operations
- Properly support its marketing efforts
- Use technology to profitable advantage
By analyzing the data in the balance sheet, we can evaluate the company’s asset management performance. This includes the management of:
- Inventory, measured with an inventory turnover ratio
- Customer credit, reflected by an accounts receivable measure
- known as days sales outstanding or collection period
- Total asset turnover, which reflects capital intensity, degree
- of vertical integration, and management efficiency
