In this section of financial statement analysis, we will evaluate the operational efficiency of the business.  We will take several items on the income statement, and compare them to the company’s capital assets on the balance sheet.

The balance sheet metrics can be divided into several categories, including liquidity, leverage, and operational efficiency.

The main liquidity ratios for a business are:

  • Quick ratio
  • Current ratio
  • Net working capital

The main leverage ratios are:

  • Debt to equity
  • Debt to capital
  • Debt to EBITDA
  • Interest coverage
  • Fixed charge coverage ratio

The main operating efficiency ratios are:

  • Inventory turnover
  • Accounts receivable days
  • Accounts payable days
  • Total asset turnover
  • Net asset turnover

Using these ratios, we can determine how efficiently a company is generating revenue and how quickly it’s selling inventory. Using the above financial ratios derived from the balance sheet will help you assess the solvency and leverage of a business.