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The balance sheet (also known as the statement of financial position or statement of financial condition) reports the firm’s financial position at a point in time. The balance sheet consists of assets, liabilities, and equity.
Assets: Resources controlled as a result of past transactions that are expected to provide future economic benefits.
Liabilities: Obligations as a result of past events that are expected to require an outflow of economic resources.
Equity: The owners’ residual interest in the assets after deducting the liabilities. Equity is also referred to as stockholders’ equity, shareholders’ equity, or owners’ equity. Analysts sometimes refer to equity as “net assets”.
Liquidity ratios
measure the firm’s ability to satisfy its short-term obligations as they come due. Liquidity ratios include the current ratio, the quick ratio, and the cash ratio.
| current assets | current ratio = |
| current liabilities |
| cash + marketable securities + receivables | quick ratio = |
| current liabilities |
| cash + marketable securities | cash ratio = |
| current liabilities |
Solvency ratios
measure the firm’s ability to satisfy its long-term obligations. Solvency ratios include the long term debt to equity ratio, the total debt to equity ratio, the debt ratio, and the financial leverage ratio.
| long term debt | long term debt to equity = |
| total equity |
| total debt | total debt to equity = |
| total equity |
| total debt | debt ratio = |
| total assets |
| total assets | financial leverage = |
| total equity |
