Free registration is required to access these resources. Login or Register.

Premium compliance products are also available in the insideARM Store

Dean Kaplan

Last month I wrote about analyzing the income statement. Today we talk about how to analyze the balance sheet, which is the topic of our fourth video in the series Introduction to Financial Statement Analysis. The videos are available for free on our website, and you can also download a free eBook which has all the information discussed in the videos.

The balance sheet tells us the accounting value of each category of assets, liabilities, and shareholders’ equity on the date of the statement. We look at the balance sheet in order to understand the company’s liquidity, strength, and efficiency.

In the credit industry, liquidity is a key measure, as it lets us know if the company has the cash available to pay its bills. Looking at the amount of cash and liquid investments reported on the balance sheet only tells us part of the picture. We also need to look at what cash requirements the company already has, such as unpaid bills and required loan repayments. The easiest way to do this is to calculate ratios.

The two most common liquidity ratios are the current ratio and the quick ratio. Detailed descriptions of these ratios are provided in the videos, and we show you how to calculate them and how to evaluate the resulting information.

Financial strength is often measured by various debt-to-equity ratios. Companies get capital from two sources: borrowing (debt) and shareholder investments (purchases of stock directly from the company plus any profit from prior periods that is kept in the company, known as retained earnings). Debt needs to be repaid, whereas the company’s shareholders’ equity (whether from investment or retained earnings) typically does not (except for certain Preferred Stock). A company with a lower debt-to-equity ratio (e.g. less debt when compared to equity) is stronger than an identical company with a higher debt-to-equity ratio. The video shows how to calculate two different financial strength ratios and how to evaluate the results.

How to calculate the Quick Ratio

Evaluating efficiency requires information from both the income statement and the balance sheet. The most common overall efficiency ratios look at profitability versus the capital invested to achieve this profit. Net Income is the most common measure of profitability, and shareholders’ equity or total assets are the two most common capital measures. The higher the ratio, the better company management is doing generating a profit from the capital invested.

We can also look at operating efficiency. This includes looking at how well the company is managing outstanding accounts receivable, inventory investment, and accounts payable. Credit professionals get insights on how fast their invoices will likely be paid by looking at a company’s average day’s payables outstanding. But, it is also a good idea to look at a customer’s receivables to see if there are any indications of future cash flow issues.

The Days Payable Outstanding ratio tells us the average payment cycle

Please check out the free videos on our websites. We encourage you to comment below on this blog post and the video series. Please let us know if there are other topics you would like us to cover, and please share any knowledge you have about analyzing financial statements.


Related Products

To the Point Technology Thumbnail

To the Point: Technology

This Operation Guide distills the information presented in our insideOperations webinar. It comes complete with a link to the full video recording of the webinar -- great for use for all-staff trainings and quarterly in-services -- as well as a Certificate of Completion and the full transcript of the webinar. This is a great resource for tracking training, allowing regulators and clients to see your agency's commitment to continuing compliance and education! (This product is approved for DBA International Certification Credit.)

To the Point: Vendor Management Thumbnail

To the Point: Vendor Management

Developed using the insight and expertise of industry experts, this To the Point report delves deep into the importance of and best practices in Vendor Management. This report doesn't just walk through what agencies should and should not be doing, going forward -- it contains the full Q&A from the webinar, too. To the Point: Vendor Management gives your agency insight and a road map of best practices. (This product is approved for DBA International Certification Credit.)

To the Point: Telephony and Voicemail Messages (Updated for 2014)

To the Point: Telephony and Voicemail Messages (Updated for 2014)

From the popular Ask the Attorney webinar series produced by us here at insideARM.com, we've culled the pressing questions and the expert answers into mini-briefs, perfect for when you only need the latest legal thinking on a specific topic. We'll get you up to speed on the following: What is the impact of the recent Meyer v. PRA appeal as it relates to manual dialing of cell numbers? Should first-party collections' departments also have measurements for abandoned call rates? Are there any new changes for auto dialers and cell phones? Can a message for a consumer be left with a live third party? When should the mini-Miranda be used? Should it be used on a dialer call? And if it’s used on the dialer call, how is that not third-party disclosure? Can you leave a message on an attorney’s voicemail?

Thumbnail - To the Point: Written and Verbal Communication

To the Point: Written and Verbal Communication

From the popular Ask the Attorney webinar series produced by us here at insideARM.com, we've culled the pressing questions and the expert answers into mini-briefs, perfect for when you only need the latest legal thinking on a specific topic. Youll learn: Is a verbal Cease and Desist as valid as a written Cease and Desist under the FDCPA? Are there any disclosures (FDCPA or state law) that should only appear on the front page, and not on a backer? Is it appropriate to insert “buck slips” in collection letters – i.e., items of interest or incentive programs? When the validation letter sent by a consumer is dated several weeks prior to the postmark on the envelope, what is the best way to respond to these letters?

Advertisement