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Balance sheet analysis refers to the process of examining and interpreting the information presented in a company’s balance sheet to gain insights into its financial health, liquidity, solvency, and overall performance. The balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time, showing its assets, liabilities, and shareholders’ equity.

When conducting a balance sheet analysis, analysts typically focus on several key aspects:

  1. Liquidity Assessment: By analyzing the composition and liquidity of the company’s assets and liabilities, analysts can evaluate its ability to meet short-term obligations. This includes assessing the current ratio (current assets divided by current liabilities) and the quick ratio (liquid assets divided by current liabilities).

  2. Solvency Evaluation: Solvency analysis involves examining the company’s long-term financial viability and its ability to fulfill long-term obligations. This is done by assessing the debt-to-equity ratio (total debt divided by total equity) and interest coverage ratio (earnings before interest and taxes divided by interest expenses).

  3. Asset Quality Examination: Analysts analyze the composition and quality of the company’s assets to assess their value, depreciation, and impairment. They review items such as accounts receivable, inventory, property, plant, and equipment, and assess their carrying value and potential risks.