Define: Balance Sheet Ratios

A balance sheet ratio is a financial metric that is calculated by comparing different items on a company’s balance sheet. It helps to assess the financial health and performance of a company.

Balance sheet ratios provide valuable insights into a company’s liquidity, solvency, and overall financial stability. They help investors, creditors, and other stakeholders make informed decisions about the company’s financial position.

Some common balance sheet ratios include the current ratio, quick ratio, debt-to-equity ratio, return on assets, return on equity, and inventory turnover ratio.

The current ratio is calculated by dividing a company’s current assets by its current liabilities. It measures a company’s ability to meet its short-term obligations.

A high current ratio indicates that a company has a strong ability to pay off its short-term liabilities. It suggests that the company is financially stable and has sufficient liquidity.

The debt-to-equity ratio is calculated by dividing a company’s total debt by its total equity. It measures the proportion of debt financing compared to equity financing.

A low debt-to-equity ratio indicates that a company relies more on equity financing rather than debt financing. It suggests that the company has a lower risk of financial distress and is less leveraged.

The return on assets is calculated by dividing a company’s net income by its total assets. It measures how efficiently a company generates profits from its assets.

A high return on assets indicates that a company is effectively utilizing its assets to generate profits. It suggests that the company is efficient and has a strong profitability potential.

The inventory turnover ratio is calculated by dividing the cost of goods sold by the average inventory. It measures how quickly a company sells its inventory and replenishes it.