Balance Sheet: Understanding the Financial Health of a Business

1. • s how much of the company’s financing comes from debt versus equity. A higher ratio indicates more leverage and higher financial risk.
   • Debt Ratio = Total Liabilities / Total Assets
     This ratio measures the proportion of a company’s assets financed by debt. A lower debt ratio indicates lower financial risk.
2. Solvency Ratios:
   • Equity Ratio = Shareholders’ Equity / Total Assets
     This ratio helps assess a company’s long-term solvency by showing the proportion of assets financed by equity.

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Conclusion

The balance sheet is a critical tool for understanding a company’s financial position. It offers valuable insights into the company’s assets, liabilities, and equity, helping businesses, investors, and analysts make informed decisions. By regularly reviewing the balance sheet, stakeholders can evaluate a company’s financial health, liquidity, and solvency, enabling them to take appropriate actions for growth, risk management, and investment.