5 ratios I use when analysing a balance sheet

Here are 5 ratios I use when analysing a balance sheet:

1 Quick Ratio

Goal: Check the solvency of a company and how fast can they repay their short term debts with their quick assets.

Formula: Quick Assets / Current Liabilities (where Quick Assets = Current Assets - Inventory)

2 Inventory Turnover

Goal: Measure how many months inventory do you have on your balance sheet.

Formula: Cost of Goods Sold / Average Inventory Note: use the Cost of Goods Sold of the last 12 months and this ratio will measure how many months of inventory you have.

For example: COGS of 100m$ / Inventory of 25m$ means that in average your inventory will last a quarter (3 months).

3 Asset Turnover

Goal: Check how much CAPEX are needed for each $ earned. The higher the number, the less assets you need to make revenues.

Formula: Turnover / Net Tangible Assets

4 Cash Conversion Cycle (CCC)

Goal: check how many days you need to convert your cash out (for inventory in cash in (from sales)

Formula: Days of Inventory Outstanding + Days Sales Outstanding Days Payable Outstanding - Note: Days of Inventory Outstanding = Average inventory for a month / Cost of Good Solds * 365 Days Sales Outstanding = Receivables / Annual Revenue * 365

Payable Days = Payables / Annual COGS 365

5 Working capital

Goal: Measure the capital used to finance the daily operations.

If you reduce it, you can free some capital to invest in CAPEX or new investments

Formula: Current Assets - Current Liabilities