A balance sheet also known as the statement of financial statement reveals the company’s assets, liabilities, and net worth at a given time. Together with the income statement and the cash flow statement, the balance sheet makes the corner stone of any company. Interested investors and creditors use the balance sheet to have a view of the company’s financial condition since it lists what a company owns and owes other people (Allen et al., 2002). The balance sheet contains a summary of the company’s assets and liabilities.
A classified balance sheet reports the current assets in a separate section from the long term assets. Similarly, it also reports current liabilities in a separate section from long term liabilities. This allows interested parties to easily calculate the working capital which is calculated by subtracting current liabilities from current assets. The balance sheet also has some limitations. A good example is that land and buildings are reported at cost minus the depreciation of houses. If the value of the assets has increased, it means that the fair value is not reported in the balance sheet.
A balance sheet is well understood using some ratios. Balance sheet ratios measure solvency, liquidity and leverage. These ratios include working capital, current ratio, debt-to-equity ratio and quick ratio (Shelton, 2012). The following ratios are based on the balance sheet of Ford Motor Company’s balance sheet from its 2012 Annual Report.
Working Capital = Current Assets – Current Liabilities
= $190554- $ 174,243
Working capital is a measure of cash flow. It shows the ability of a company to meet its current obligations. The higher the ratio the healthy is the company. From the ratio above, it can be said that Ford Motor Company is financially healthy.
Current ratio= Current Assets ÷ Current Liabilities
The current ratio is a measure of financial strength. It shows whether a company is able to pay its current debts with a safety margin. A generally accepted ratio is 2:1 but it can be low as 1:1. Ford Motor Company has a current ratio of 1:1 which means it is playing very close to comfort.
Quick ratio= (Current Assets – Inventories) ÷ Current Liabilities
Quick ratio measures the liquidity of a company. It concentrates on the really liquid assets by excluding inventories. It measures if a company can meet its current obligations if revenue disappears. A ratio of 1:1 is considered satisfactory. Ford Motor Company has a quick ratio of 1.05: 1 which is satisfactory.
Debt-to-equity ratio= Total Liabilities ÷ Shareholders’ Equity
Debt-to-equity ratio measures how dependent a company is to debts. A lower ratio is viewed favorable in most industries. Ford Motor Company has a Debt-to-equity ratio of 10.9 which is relatively high and suggests that the company fiancés most of its capital through debts.
An important ratio for evaluating motor companies is the debt-to-equity ratio. The average ratio for large companies such as Ford Motors is 2.5 (Maverick, 2015). However, Ford motors has a ratio of 10.9 which is far much than the industry average.
Allen, M., Keller, C., Setser, B., Rosenberg, C. B., & Roubini, N. (2002). A balance sheet approach to financial crisis (No. 2002-2210). International Monetary Fund.
Maverick, J. (2015). Key Financial Ratios to Analyze The Automotive Industry | Investopedia. Investopedia. Retrieved 11 July 2016, from http://www.investopedia.com/articles/active-trading/082015/key-financial-ratios-analyze-automotive-industry.asp
Shelton, M. (2012). Useful Balance Sheet Metrics | Investopedia. Investopedia. Retrieved 11 July 2016, from http://www.investopedia.com/financial-edge/1012/useful-balance-sheet-metrics.aspx
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