What is the balance sheet?
The balance sheet of a company is a mandatory document which presents the financial situation of the company at a specific time. The balance sheet allows you to know the value of the company and measure its financial state. It is established at a specific point in time, usually at the end of the financial year, and must be updated each year to reflect the financial position of the company at the financial year end date. The balance sheet is a mandatory document for all companies, regardless of the legal form of the company. It is established according to precise rules and must be signed by the manager(s) of the company.
The elements that make up the balance sheet
It consists of two parts: assets and liabilities. It is presented in table form, with one part devoted to assets and another to liabilities.
The asset
Assets consist of property and rights owned by the company, such as real estate, merchandise inventories, receivables from customers, etc. It distinguishes two parts:
- Fixed liabilities: equity
- Current liabilities: debts
Indicators that help read the balance sheet
There are several indicators that allow you to better understand and read a company’s balance sheet. It is important to take into account these different indicators to have a complete vision of the financial situation of the company and its profitability.
The working capital requirement
Working capital
Working capital or WC makes it possible to define the surplus of stable capital in relation to sustainable jobs. It is calculated as follows: (equity + medium and long-term borrowed capital) – fixed assets.
If the WC is lower than the WCR, this means that the company has a financing need to cover its working capital needs. If the WC is greater than the WCR, it means that the company has excess liquidity that can be used to finance its business.
It is important to monitor the company’s WCR to ensure that it has the necessary funds to cover its short-term needs and avoid any risk of financial failure.
The liquidity ratio
It measures the company’s ability to meet its short-term obligations. It is calculated by dividing current assets (cash, inventories, customer receivables) by current liabilities (short-term borrowings, supplier debts).
The debt ratio
It indicates the level of debt of the company and is calculated by dividing the total debt by the balance sheet total. The higher this ratio, the more debt the company has.
The interest coverage rate
It indicates the company’s ability to repay its interest on its loans. It is calculated by dividing the net income by the interest paid.
The margin rate
It measures the profitability of the company on its sales and is calculated by dividing the net profit by the turnover.