Reading Financial Ratios from the Balance Sheet
A balance sheet has three sections: Assets, Liabilities, and Equity. Financial ratios connect these to income statement data to reveal the full financial picture.
Balance Sheet Structure
ASSETS LIABILITIES + EQUITY
Current Assets Current Liabilities
Cash Accounts Payable
Accounts Receivable Short-term Debt
Inventory Long-term Liabilities
Non-current Assets Long-term Debt
Property & Equipment Shareholders' Equity
Intangibles Common Stock
Retained Earnings
Ratios from Balance Sheet Data
| Ratio | Balance Sheet Lines Used |
|---|---|
| Current Ratio | Current Assets ÷ Current Liabilities |
| D/E Ratio | Total Debt ÷ Total Equity |
| Equity Ratio | Total Equity ÷ Total Assets |
Ratios Combining Balance Sheet + Income Statement
| Ratio | Income Statement Line | Balance Sheet Line |
|---|---|---|
| ROA | Net Income | Total Assets |
| ROE | Net Income | Shareholders' Equity |
| Asset Turnover | Revenue | Total Assets |
Red Flags to Watch
- Current ratio < 1.0: More short-term obligations than short-term resources
- D/E > 3: High leverage relative to equity base
- ROA declining year-over-year: Assets growing faster than profits
- Equity shrinking: Net losses or heavy dividend payouts eroding the equity base
Plug any balance sheet and income statement into the Financial Ratios Calculator to instantly compute all six ratios.