How to Analyze a Balance Sheet for Financial Insights

Key takeaways

Balance sheet analysis involves using financial metrics like current ratios and debt-to-equity ratios to understand a company’s financial health. Here are some important things to know:

• A 2024 PwC study found that 55 percent of investors relied significantly on financial statements to inform their investment decisions [1].

• The balance sheet structure includes assets, liabilities, and shareholders’ equity, organized according to the balance sheet equation: Assets = Liabilities + Shareholders’ equity.

• You can use balance sheet analysis to make strategic decisions, identify financial trends, manage risk, inform investors, and more. 

Learn how to analyze a balance sheet using key financial metrics, and learn more about the components and benefits of balance sheets. If you’re ready to start learning, enroll in the Intuit Academy Bookkeeping Professional Certificate. You’ll have the opportunity to gain experience with financial accounting, balance sheet preparation, and financial statement analysis in as little as two months.

What is a balance sheet?

A balance sheet is a financial document that reflects a company’s financial position at a given point in time. Outlining a business’s assets, liabilities, and owners’ equity, a balance sheet helps investors and banks understand a company’s financial position, including the funds invested and the total debt. The balance sheet is part of a company’s financial statements, along with the cash flow statement and income statement. 

Key components: The balance sheet format explained

You’ll typically organize a balance sheet into two sections: total assets and total liabilities plus shareholders’ equity. You can format your balance sheet in columns, with total liabilities in the left column and total liabilities plus shareholders’ equity on the right. Alternatively, you may also list your assets in the top section and your liabilities and equity in the section below. 

The balance sheet must always balance, which means the following equation will always apply: 

Assets = Liabilities + Shareholders’ Equity. 

A company's assets must always match the total of its debts and the shareholders’ equity, showing how it finances its resources. Understanding this equation is critical to evaluating a company’s net worth and making sure the balance sheet data are accurate.

Explore the three components of a balance sheet in detail to gain a deeper understanding of how each contributes to the overall purpose of a balance sheet.

Assets

Assets are quantifiable items that the company owns and can convert to cash (or liquidate) at some point in the future. You’ll find two types of assets based on when you can liquidate them: current and non-current assets. In a balance sheet, you’ll list more liquid assets before less liquid or non-liquid assets.

• Current assets: This includes all assets you can turn into cash within a year. Cash is usually the first item you’ll list under this category, which also includes nonrestricted bank accounts. Next, you’ll list accounts receivable, which includes any amounts that clients owe your company from the sale of products or services on credit. Then, you’ll list your inventory, which represents the amount of raw materials or goods you have for sale.

• Non-current assets: These are long-term assets that a business doesn’t expect to liquidate in a year. Non-current assets include land, property, equipment, and machinery, plus intangible assets like patents, licenses, or copyrights.

Liabilities

Liabilities represent the money the company owes to external parties, like debt or taxes. They are also divided into current and non-current liabilities.

• Current liabilities: These include any amounts due within the next twelve months. Short-term liabilities include accounts payable, which represent the money owed to suppliers for goods or services purchased on credit, and current payable amounts for long-term loans. 

• Non-current liabilities: These are debts or obligations scheduled to be repaid after at least one year. This may include the value of bonds that will mature in several years and the total amount of the company’s long-term debt.

Shareholders’ equity

Shareholders’ equity is the difference between total business assets and total liabilities. The resulting number is the shareholders' residual interest in the company. Shareholders initially invested some capital in the business for partial ownership, usually in the form of shares or stock. When a business holds onto profits after covering expenses and obligations, those retained earnings move from the income statement to shareholders' equity on the balance sheet, increasing the firm's overall value.

What are the three main ways to analyze financial statements?

You can analyze financial statements using the following three methods:

- Vertical analysis: Compares the relationship between different items in a financial statement for the same period; for example, expressing an expense as a percentage of total revenue

- Horizontal analysis: Compares financial data across different reporting periods, usually to identify trends in growth; for example, comparing net revenue for each quarter to identify how sales are changing over time

- Ratio analysis: Compares multiple line items using financial metrics to gain insights into various aspects of a business, like liquidity or share earnings

How to analyze a balance sheet of a company​

Analyzing a company’s balance sheet provides insights into how efficiently the company operates and its financial standing at a specific point in time. Financial ratio analysis helps you determine your company’s profitability, liquidity, and financial strength, as well as compare your company’s performance over time or against competitors. Financial ratio analysis often involves using data from financial statements other than the balance sheet, such as the income statement.

Before exploring the different financial ratios used to analyze balance sheets, consider checking your balance sheet for the following:

1. Check your balance sheet's accuracy: Confirm that the total assets match the total liabilities plus equity. If it doesn’t balance, check if you’ve classified assets and liabilities correctly or whether any of the data is incorrect or missing.

2. Check if the equity is positive or negative: A positive equity means your company is more likely to be financially healthy, while a negative equity means you have more liabilities than assets.

3. Check the distribution of your assets and liabilities: Review how evenly your long-term and short-term assets and liabilities are distributed so you can identify any potential issues with cash flow. 

Now that you’ve checked your balance sheet for any discrepancies, you can start analyzing your balance sheet using financial ratios. Different financial ratios provide different types of insights about your company.

Liquidity ratios

Liquidity ratios help determine whether a company has sufficient liquid assets or available cash to pay off short-term debts. Popular liquidity ratios include:

• Current ratio: This metric shows how well a business can meet its short-term obligations using short-term assets, as calculated by the equation: 

Current ratio = Total current assets / Total current liabilities. 

A higher current ratio generally indicates a stronger ability to handle short-term financial commitments.

• Quick ratio: This measures the company’s ability to pay off current liabilities with the most liquid assets, excluding inventory and long-term investments. The formula for this is: 

Quick ratio = (Cash and equivalents + Marketable securities + Accounts receivable) / Current liabilities.

• Net working capital: This is calculated by subtracting current liabilities from current assets to determine the funds remaining to operate the business and pay off short-term obligations.

Leverage or financial strength ratios

Financial strength ratios offer insights into a company's ability to repay its debts and its reliance on debt to finance its assets or operations. Generally, lower leverage ratios indicate less reliance on debt. Common ratios in this area are:

• Debt-to-equity ratio: This ratio compares the company's total debt to shareholders' equity. Higher debt-to-equity ratios indicate an overreliance on external funds and higher financial risk for investors. The formula for this is: 

Debt-to-equity ratio = Total debt / Total shareholders’ equity.

• Debt-to-EBITDA ratio: This measures the company's ability to generate cash flow and the amount that will be available to pay off debt before taxes, interest, and other expenses. The formula for this is: 

Debt-to-EBITDA = Total debt / EBITDA.

Activity ratios

Activity ratios help determine how efficiently a company manages its current assets in its operations. This generally looks at inventory, accounts payable, accounts receivable, and assets, calculating turnover in these areas to evaluate how well the company utilizes its assets or capital to generate revenue.

Why should you use balance sheets?

You should use balance sheets to understand a business’s financial position and assess its stability at a given point in time. When taken together with the income statement and cash flow statement, it offers a comprehensive view of the company’s performance for both internal and external stakeholders. You might use a balance sheet for several reasons, including:

• Identify financial trends: By comparing balance sheets over time, you can spot any patterns or trends in how your finances have changed, helping you create a well-informed risk profile.

• Make informed decisions: Analyzing your balance sheet will provide you with insights for making strategic decisions, like whether to invest your earnings or cut back costs.

• Manage credit and risk: A balance sheet can help you understand financial risks, like high debt, and take action to mitigate them. Banks might also look at your balance sheet to determine if you’re eligible for more credit.

• Support investors: Investors review balance sheets to gain an idea of a company’s net worth, ability to pay dividends, and generate returns to evaluate whether a company is worth investing in.

• Increase competitiveness: Balance sheet metrics like the debt-to-equity ratio and quick ratio can help you identify which financial areas to improve to better compete against other businesses.

• Comply with regulations: Regularly filing balance sheets and other financial statements helps ensure compliance with legal requirements, minimizing the potential for penalties and fraudulent activities. 

When should you use something other than balance sheets?

When you need insights into your company’s profitability, where to allocate resources, track revenue trends, and gain a general idea of how your company performed during a specific period, you’ll use an income statement instead of a balance sheet. 

When you need to track how much money you’ve spent on financing, investment, and operational activities against how much money you made throughout the reporting period, you’ll use a cash flow statement.

Who uses balance sheets?

Several individuals, including business owners, employees, investors, lenders, and financial auditors, use balance sheets for different purposes. When reviewed internally, business owners and employees may use balance sheets to determine the company’s financial position and then use this information to formulate strategies or adjust their processes to meet a shared objective. An investor may use your balance sheet to understand how you finance your business and predict future performance to determine whether your company is worth investing in. In fact, a 2024 PwC survey found that 55 percent of the investors surveyed relied significantly on financial statements to inform their investment decisions [1]. Lenders and banks may also look at your balance sheet when determining your eligibility for loans. Financial auditors may use your balance sheet to determine whether you’re complying with relevant regulatory standards. 

In terms of jobs, you’ll find various financial roles that might require you to work with balance sheets. These roles include the following, shown below with their median salaries:

• Asset and liability analyst: $61,000 [2]

• Corporate finance analyst: $138,000 [3]

• Financial administrator: $89,000 [4]

• Financial auditor: $113,000 [5]

• Chartered accountant: $192,000 [6]

All salary information represents the median total pay from Glassdoor as of October 2025. These figures include base salary and additional pay, which may represent profit-sharing, commissions, bonuses, or other compensation.

Read more: What Is a Financial Analyst’s Salary?

How to analyze a balance sheet for investing

When analyzing a balance sheet for investment purposes, investors use the data to calculate key metrics, including the cash conversion cycle (CCC), fixed asset turnover rate (FAT), and return-on-assets ratio (ROA). These measurements provide insight into a company's management of its working capital through accounts payable, accounts receivable, and inventory (CCC), as well as the analysis of average fixed assets and net sales (FAT), and the profit earned from its assets (ROA).

Tools and resources for analyzing balance sheets

You can find various resources, such as spreadsheets, financial software, and data analytics tools, to analyze balance sheets. Leverage spreadsheet software like Microsoft Excel to automatically calculate financial metrics, as well as visualize your financial data. Software like QuickBooks can help you quickly generate financial statements from your data and make comparisons across different reporting periods. You can use Tableau if you’re looking for more advanced data analysis features, which will allow you to automate data consolidation from external spreadsheets like Excel and generate complex visualizations of your data. 

AI-powered financial statement analysis software like Workiva and Docyt can help you not only automate the balance sheet creation process but also implement AI algorithms to analyze your financial data with accuracy and precision. SAP also offers a Balance Sheet Reconciliation Automation Bot to help you automate the process of verifying the information on your balance sheet. 

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