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Analyze a business with just a Balance Sheet 🧐

Analyze a business with Balance Sheet

Click the image above to read the complete guide

Most people think all 3 Financial Statements are created equally…

But to me, there’s one statement that is SUPREME to all the others

And that’s the Balance Sheet

➡️ What’s so special about a Balance Sheet?

Perhaps a better way to look at this would be what are the limitations of the other statements…

1️⃣ The Profit and Loss isn’t connected to any other reports

It’s an independent report that show’s you how much you earned in income

and how much you incurred in expenses…

But it leaves you clueless as to what you OWN, and what your obligations are to creditors + owners

2️⃣ The Statement of Cash Flows does not contain any unique data

What do I mean by that?

The Statement of Cash Flows just pulls from your Income Statement and Balance Sheet

It doesn’t show you new information that you can’t find on those 2 statements

and it’s pretty easy to generate on your own

*Note: This is mainly in regards to preparing information using the indirect method, which is the most common

To sum it up… the Balance Sheet contains data from your Profit & Loss…as well as unique data you won’t find elsewhere

➡️ How can you analyze a business with just a Balance Sheet?

A few ways…

1️⃣ Calculate net income by taking the ▲ in Retained Earnings

2️⃣ Create a cash flows statement by taking the ▲ in all balance sheet accounts, other than cash

3️⃣ Analyze key ratios

Here are 5 that you can review

▪️ Current ratio → compares current assets to current liabilities

▪️ Debt to Equity ratio → Compares total debt to shareholders equity

▪️ Return on Assets → Compares net income to total assets (*typo in the guide!)

▪️ Operating Cash Flows ratio → compares operating cash flows to total debt

▪️ Return on Equity → measures net income as a % of shareholders equity

That’s my take on how to analyze a business with just a Balance Sheet


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