how can ratio analysis help you understand the balance sheet of a firm?

Question

annual report

Answer 1

By using ratios you can compare one period to another and check if the trends are positive or negative.

For instance if the Current ratio (Current Assets / Current Liabilities) is increasing over a three year period then you can infer that the company is profitable as the amount of assets is growing faster than the amount of liabilities.

Answer 2

First of all, a Balance Sheet is a snapshot of a company's financial picture as of a particular moment in time. It shows you the companies assets, liabilities, and net worth.

Ratio analysis is a series of numerical calculations that are used to determine how well the company is doing. In other words, is the company in financial trouble or OK?

For example, liquidity ratios measure a companies ability to convert assets to cash. The more easily it can be done, the better able a company is to deal with a financial crisis.

Debt to equity ratio shows whether a company is more heavily financed with bonds or with stocks. With bonds, you MUST repay bondholders, which means you've got a major financial responsibility over time. But stockholders don't HAVE to be paid. Overuse of one or the other isn't a good idea.

Answer 3

a balance sheet is a snapshot for today....the ratio given can tell you more about the workings of the company........any ratio 2:1 or better is acceptable....obviously the higher the ration 5:1 etc tells you that this company at this point in time is strong in assets. the ratio is assets first then liabilities

but for more accuracy you would need to see more than one balance sheet spread out in a month or months