Balance Sheet Question

Q: What in the balance sheet shows the owner how well the business is doing?

A: There are a number of indicators of business success or failure in the balance sheet:

• First and foremost, what portion of assets is owned by the owner (as opposed to owed to liabilities)? Take the total equity and divide it by total assets. What is the percentage here? (This ratio is known as the equity ratio by the way.)


• How much cash does the business have and how much credit? Cash is the lifeblood of a business. A business that deals in more credit has more risk of non-payment by creditors.


• How much assets does the business have? Assets are the basic value of a business. One business may have only $500 of assets, whereas another may have $500 million assets. Thus it is an immediate indicator of the size of a business.


• How big are the business debts (liabilities)? A business with fewer debts is obviously in a better position. Besides the fact that the owners have more control over the assets, there will also be smaller interest payments (as the debts themselves are smaller).

Remember that when evaluating a business one should not look at the balance sheet only. One should always look at the income statement and statement of changes in owner's equity and cash flow statement too, as these will also contain indicators of financial performance for a business.